PATTON 


ADDRESS 


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TO  THE 


Voters  of  the  6th  Congressional  District 
of  California 


ON 


The    O^vnersliip  of   the    Pacific    Rail- 
roads by  the  Governmeiit 

AND 

The  Location  of  a  Deep  Sea    Harbor 
at  San  Pedro 

BY 

aEO.  S.  P^TTON, 

Democratic  Nominee  for  Congress, 
Sixth  District, 

TO  WHICH  IS  ADDKD 

An  Abstract  of  the  Reports  of  the  United  States 

Pacific  Railway  Commission,  under  Act 

of  Congress  of  March  S,  1887, 

WITH 

*  Suggestions  as  to  the  Legal  Remedies  of  the  Gov- 
ernment for  the  Recovery  of  its  Debt. 


Kinsell  &  Doan,  Printers  and  Publishers, 

311  New  High  St.,  Los  Angeles, 

California. 


lOitfo  tAt  ^(yni/fihtOmbrbt^  oj  Sm.  ^.  S^attan 


m 


ADDRESS 


To  the   Vcters  of  the  Sixth  Congressional  District:  jJljffl 

—■  •■» 

Fellow  Citizens:  The  Republican  press  and  speakers  assert 
that  there  is  no  railroad  issue  in  California  this  year.  To  make 
this  appear  they  vociferously  declare,  although  their  platform 
is  altogether  silent  upon  the  subject,  that  they,  as  well  as 
the  Democrats,  are  infavor  of  compelling  payment  of  the  Gov- 
ernment debt  by  the  Pacific  Railroad  Companies  ;  and  hence, 
they  would  have  you  infer,  notwithstanding  the  significant  sil- 
ence of  their  platform,  that  they  are  at  one  with  the  Democratic 
party  in  their  adverse  attitude  towards  the  Pacific  Railroad 
companies,  and   especially  the  Southern  Pacific. 

That  this  is  undoubtedly  true  of  the  voting  masses  of 
the  Republican  party,  and  that  they,  like  their  Democratic 
fellow  citizens,  are  opposed  to  the  further  domination  of 
the  State  by  the  Railroad  corporation,  is  freely  admitted. 
But  the  voice  of  this  element  has  been  stifled  by  the  un- 
scrupulous political  '  *  boss' '  now  in  control  of  the  party,  and 
finds  no  utterance  in  the  platform  put  forth  as  the  declaration 
of  party  principles — an  omission  which  the  press  and  candidates 
of  that  party  seek  to  remedy  by  deluding  their  hearers  with  the 
glittering  generalities  to  which  I  have  alluded. 

How  far  these  declarations  fall  short  of  the  necessities  of  the 
case,  and  of  the  bold  and  radical  stand  taken  by  the  Demo- 
cratic party,  I  shall  endeavor  to  show.  But  to  do  this  it  will 
be  necessary  first,  to  recount  briefly,  the  history  of  the  con- 
struction and  financial  management  of  the  Pacific  Railroads  ; 
which,  as  known  to  all,  has  resulted  on  the  one  hand  in  the 
apparent  insolvency  of  the  railroad  companies  and  their  con- 
sequent inability  to  pay  their  immense  indebtedness  to  the 
Government,  and  on  the  other  in  the  unprecedented  enrich- 
ment of  the  individual  directors. 

The  story  is  given  at  length  in  the  report  of  '  'the  United 
States  Railway  Commission,"  appointed  under  the  Act  of 
March,  1887,  to  investigate  the  subject,  and,  as  there  told  must 
be  accepted  by  all  as  authentic.  It  is  too  long  for  recital  in  all 
its  details  in  the  limits  of  a  single  speech  or  address,  and  I  am, 


— 4— 

therefore,  compelled  to  confine  myself  to  a  mere  statement  of 
the  general  results  reported  by  the  Commissioners  ;  but  to  give 
to  all  who  may  desire  to  pursue  the  inquiry  for  themselves  an 
opportunity  to  do  so,  I  have  had  prepared  and  append  to  this  ad- 
dress an  abstract  of  the  reports  of  the  Commission,  which  I  earn- 
estly recommend  to  your  attention.  The  perusal  of  this  abstract 
or  of  the  reports  of  the  Commission  will,  I  am  sure,  be  found 
interesting,  and,  to  those  not  familiar  with  the  methods  by 
which  the  Pacific  Railroad  Companies  have  been  looted  by 
their  directors,  even  startling.  It  is  the  story  of  a  few  men  ot 
moderate  means,  who,  taking  advantage  of  the  generosit}-  of 
the  Government,  have,  by  the  most  open  and  unblushing 
fraud,  become,  in  a  few  years,  the  possessors  of  untold  wealth, 
and  the  political  arbiters  of  the  destinies  of  this  and  of  other 
Western  States.  And  if  you  will  read  the  abstract  of  the 
reports  hereto  appended, and  consider  to  what  extent  the  indus- 
tries of  the  State  o'^  California  have  been  burdened  and  op- 
pressed, and  the  wealth  of  its  people  diverted  into  the  pockets 
of  these  fortunate  individuals,  you  will  be  at  a  loss  to  account 
for  the  patient  submission  of  the  people  to  the  misconduct  of 
their  officials,  through  whose  neglect  or  corruption  the  Govern- 
ment has  been  robbed. 

The  pending  issue  between  the  parties  arises  upon  the  question 
of  the  respective  methods  proposed  for  treating  the  indebtedness 
of  these  roads  to  the  Government;  and  to  understand  this  it  will 
be  necessary  to  explain  the  history  of  the  construction  of  the 
Pacific  Railroads  and  of  their  subsequent  financial  management, 
the  exisiting  status  of  their  indebtedness  to  the  United  States 
and  their  present  financial  condition.  The  subject  will  be 
considered  in  the  order  stated. 

The  general  methods  of  construction  adopted  by  all  the 
Pacific  Railroad  Companies  was  for  the  directors  to  let  the  con- 
tracts for  construction  to  auxiliary  corporations  in  which  they 
were  the  sole  parties  in  interest,  and  to  pay  to  such  companies 
or  in  other  words  to  themselves,  for  the  construction,  all 
of  the  bonds  and  all  of  the  stock,  thus  pocketing  as  clear 
profits  the  difference — in  all  cases  excessive — between  the 
the  amounts  thus  paid  and  the  actual  cost  of  construction.  On  i 
this  point  I  commend  to  your  attention  the  interesting  observa- 
tions of  the  Commissioners,  which  will  be  found  on  pp.  7  and  8 
of  the  appended  abstract,  where  these  methods  are  explained  at 
greater  length. 

The  Central  Pacific  and  the  Union  Pacific  Railroad  Com- 
panies, as  now  constituted,  consist  each  of  the  original  subsi- 
dized lines  and  of  several  important  branch  lines  built  by  and 
consolidated  with  them. 

In  the  construction  of  the  subsidized  portions  of  the  roads 
the  general  result  was  that  the  roads  were  actually  built  and 


— 5— 

equipped  for  less  than  the  amount  of  the  Government  bonds 
and  the  first  mortgage  bonds,  and  that  the  directors  and  stock- 
holders of  the  construction  companies  received  for  the  con- 
struction, the  balance  of  the  bonds,  and  the  whole  of  the  stock 
and  land  grant ;  and  with  reference  to  the  branch  roads  the 
general  methods  were  the  same. 

The  profits  realized  by  the  directors  are  detailed  by  the 
Commissioners  in  the  tables  appearing  on  pages  13  and  15  of 
the  abstract,  which  are  here  reproduced. 

The  directors  of  the  Central  Pacific  Railroad  received  for 
this  construction  : 

In  cash $41,573,719.47 

In  bonds 18,713,000.00 

In  stocks 60,585,810.22 

Total .• $120,872,529.69 

Total  cost  of  construction 58,301,831.85 

Leaving  Surplus  profits  of $  62,570,697.84 

' '  Of  which  there  were  : 

Stocks $60,585,810.22 

Bonds 1,984.887.62 

In  the  case  of  the  Union  Pacific  Railroad,  the  roads 
were  built  and  equipped  for  $38,824,000,  and  the  directors 
received  in  bonds   and  stock  : 

First  mortgage  bonds $  27,237,000.00 

United  States  bonds 27,236,512.00 

Land  grant  bonds 9,224,000.00 

Income  bonds 9,355,0B0.00 

Stock 36,762,300.00 

Total $109,814,812.00      . 

Cost  of  construction $38,824,000.00 

Leaving  surplus  profits  of. 170,990,812.00 

As  to  the  subsequent  management  of  the  Pacific  Railroads, 
the  general  result  of  the  facts  stated  by  the  Commission- 
ers is  that  all  the  profits  of  the  roads,  which,  during  a  large 
part  of  the  time  were  enormous,  were  appropriated  by  the 
directors  in  disregard  of  the  indebtedness  of  the  companies  to 
the  Government. 

In  the  case  of  the  Central  Pacific  during  the  years,  from 
January  i,  1874  to  January  i,  1884,  the  aggregate  net  earn- 
ings of  the  company,  after  deducting  operating  expenses, 
interest  and  taxes  and  Government  requirements,  was 
$52,536,916.99,  being  within  $6,000,000.00  of  the  cost  of  con- 
struction of  the  road  and  all  its  branches,  (which  was 
$58,301,831.85);  and  there  was  distributed  to  the  stockholders, 
Stanford,  Huntington,  Hopkins  and  Crocker,  during  the  same 
period  in  dividends,  the  sum  of  $32,308,055.00,  being  over 
$3,000,000  00  per  annum,  and  in  the  aggregate  more  than  half 
the  cost  of  construction.  The  balance  of  the  net  earnings, 
— after  paying  dividends, — amounting  to  over  $20,000,000.00 
were  used  in  the  construction  of  branch  roads,  all  of  which, 


— 6— 

the  Commissioners  report  were  bonded  to  their  full  value; 
and,  as  these  bonds,  or  their  proceeds,  were  received  by  the 
gentlemen  named,  it  may  be  said  that  the  whole  amount  of  the 
net  earnings,  during  this  period,  $52,500,000.00,  were  appro- 
priated by  them.       (See  Abs.  pp.  17-18.) 

The  earnings  of  the  Union  Pacific  for  the  years  1 870-1 883, 
inclusive,  after  deducting  operating  expenses,  amounted  to 
$103,806,120.16;  of  which  there  was  distributed  as  dividends 
the  sum  of  $30,585,573.13.     (See  Abs.  p.  18.) 

As  appears  from  the  reports  of  the  Commissioners  the 
indebtedness  of  the  Central  Pacific  Company  to  the  United 
States,  at  the  maturity  of  the  bonds,  will  be  $77,995,904.00 
less  the  sum  to  its  credit  in  the  Sinking  Fund  in  the  United 
States  Treasury  under  the  Thurman  Act;  and  its  other 
bonded  indebtedness — all  of  which  constitutes  liens  on  the 
branch  roads  prior  to  the  lien  of  the  United  States — amounts 
to  $62,387,000.00.  Hence,  in  the  opinion  of  the  Commission- 
ers, as  the  value  of  its  roads  and  equipments  is  less  than  the  last 
amount,  the  Company  is  entirely  insolvent,  even  with- 
out taking  in  consideration  the  indebtedness  to  the  Gov- 
ernment, and  it  is  clear  that  this  indebtedness  cannot 
in  any  way,  be  collected  from  the  admitted  assets  of  the 
Company.  The  general  statements  of  the  Republican  nomi- 
nees that  the  debts  to  the  Government,  must  be  paid,  are 
therefore  without  significance,  unless  these  gentlemen  will  tell  us 
how  this  immense  debt  is  to  be  collected  out  of  property  whose  val- 
ue is  admittedly  less  than  the  amount  of  prior  liens.  They  should 
go  further  and  indicate  to  us  the  means  by  which  this  desirable 
end  is  to  be  effected.  These  means  to  Democrats  are  sufficiently 
obvious,  and  the  Democratic  platform  sufficiently  outlines  them. 
They  consist  in  subjecting  the  personal  estates  of  Stanford, 
Crocker,  Hopkins  and  Huntington,  fraudulently  acquired  by 
them,  to  the  payment  of  the  debt.  That  these  estates,  upon  the 
admitted  facts,  and  well  established  principles  of  law  are  liable 
cannot  be  doubted.  But  we  have  yet  to  hear  of  any  Repub- 
lican orator  who  has  referred  to  the  fraudulent  methods  by 
which  the  Central  Pacific  Railroad  Company,  and  its  creditor, 
the  United  States,  have  been  defrauded,  by  the  individuals 
named,  or  who  has  asserted  the  liability  of  the  fraudulent 
appropriators  to  the  company,  and  indirectly  to  the  Govern- 
ment for  the  whole  amount  due  to  it,  or  has  declared  that  the 
Republican  Congressional  candidates  will,  if  elected,  adopt 
the  finding  of  the  Commissioners  and  vote  for  all  requisite 
means  to  collect  from  the  fraudulent  directors  of  the  Central 
Pacific  Company,  the  debt  due  to  the  Government. 

The  present  Democratic  administration  has  taken  the  initial 
step  to  collect  this  debt;  and  its  action  is  justified  by  eminent 
legal  opinion  on  the  following  grounds,  viz: 


7 

That  the  conduct  of  the  directors  was  in  conflict  with  the 
familiar  and  well  established  rule  of  law  which  forbids  the 
directors  of  corporations  or  other  fiduciaries  to  deal  with  the 
subject  of  their  trust  for  their  personal  advantage,  and  which 
declares  such  conduct  constructively  fraudulent,  and  that  all 
profits  thus  realized  must  inure  to  the  benefit  of  the  bene- 
ficiaries. 

That  the  directors  were  also  guilty  of  actual  fraud.  For 
it  was  their  duty  to  the  company  and  indirectly  to  its  creditors 
and  stockholders  to  procure  the  performance  of  the  work  of 
construction  and  equipment  in  the  most  economical  manner, 
and  the  extravagant  and  enormous  profits  realized  by  them 
cannot  be  otherwise  regarded  than  as  a  fraudulent  appropria- 
tion of  the  assets  of  the  company. 

That  the  issue  of  the  stock  to  themselves  without  money 
consideration  was  itself  in  direct  conflict  with  the  Act  of  1864 
which  forbade  payment  to  be  received  for  stock  otherwise  than 
in  gash.  Stock  thus  illegally  issued  to  themselves  must, 
therefore,  under  estabHshed  rules  of  law  be  regarded  as  held 
by  them  in  trust  for  the  companies.  This  illegal  issue  of 
stock,  it  is  to  be  observed,  was  covered  up  and  concealed  from 
the  government  by  false  afiidavits  of  Stanford  and  others. 
That  the  issue  of  enormous  sums  to  themselves  by  the  di- 
rectors as  dividends  was  illegal.  Independently  of  other  reasons, 
as  the  stock  itself  was  held  in  trust  for  the  conpanies, 
the  profits  also  belonged  to  them. 

That  by  these  fraudulent  practices  the  Union  Pacific  Rail- 
road Company,  in  1884, — when  a  new  and  better  management 
of  its  affairs  took  place, — was  reduced  to  the  verge  of  insolv- 
ency; and  the  Central  Pacific  Railroad  Company  was  reduced 
to  actual  insolvency  so  complete  that  the  subsidized  portions 
of  the  roads  of  this  company  are  asserted  by  Mr.  Hunting- 
ton to  be  worth  less  than  the  amount  of  the  first  mortgage 
bonds.  The  result,  therefore,  has  been  to  defraud  the 
Government  by  depriving  the  companies  of  all  means  of 
paying  their  indebtedness  to  it. 

A  still  more  serious  result  is  that  the  roads  have 
been  capitalized  at  about  three  times  their  value;  that  is  to  say, 
their  bonds  and  stock  amount  to  about  three  times  the  actual 
cost  of  construction  and  equipment;  and  freights  and  fares  have 
been  established  by  the  managers  of  these  roads  so  as  to  pay 
a  profit  upon  all  this  fictitious  capital,  and  the  public  has  been 
thus  subjected  to  a  burden  of  about  three  times  what  it  ought 
to  have  been  subjected  to;  all  of  which  is  clearly  shown  by 
the  tables  of  Gov.  Pattison,  showing  the  total  amounts  re- 
ceived for  construction,  the  actual  cost,  and  the  resulting 
fictitious  capital,  which  will  be  found  on  pages  15-17  of  the 
abstract. 


It  may  be  stated  here,  also,  that  the  Southern  Pacific  road, 
an  independent  road  constructed  by  practically  the  same  syn- 
dicate out  of  booty  derived  by  its  builders  from  the  construction 
of  the  Central  Pacific,  is  bonded  and  stocked  at  an  average  of  over 
$70,000.00  per  mile — and  that  the  best  experts  claim  it  could 
be  built  for  one  third  of  that  sum;  and  it  is  upon  this  fictitious 
capital  also  that  the  producers  of  California  are  taxed  in  ex- 
horbitant  freight  rates  to  pay  interest. 

The  case  of  the  Government  and  of  the  people  against  the 
Central  Pacific  Railroad  Company  and  it's  fraudulent  direc- 
tors, Stanford,  Crocker,  Hopkins  and  Huntington,  as  above 
stated,  rests  upon  the  deliberate  findings  of  the  United  States 
Pacific  Railway  Commissioners,  after  an  exhaustive  investiga- 
tion; and  a  glance  at  the  Abstract  appended  will  be  sufficient  to 
establish  the  justice  of  their  conclusions. 

Stanford  and  Huntington  expressly  admit  that  the  stock  ol 
the  company  received  by  the  directors  for  the  construction 
and  equipment  of  the  road — which  was  all  the  stock  of  the 
company — was  substantially  clear  profit,  and  that  they  paid  no 
consideration  therefore.  And  in  effect  they  and  their  associates 
admit  the  whole  case  in  the  written  argument  filed  in  their 
behalf  before  the  Commission  ;  which,  together  with  the 
remarks  of  the  President  thereon  will  be  found  in  the  Abstract 
on  pages  23-4,  and  is  earnestly  recommended  to  your  atten- 
tion. 

The  Commissioner  (Governor  Pattison),  states  that,  had 
the  roads  been  built  and  managed  upon  honest  methods,  and 
as  contemplated  by  the  Government,  they  could  in  addition  to 
enormous  profits  to  themselves  have  repaid  every  cent  of  the 
principal  and  interest  advanced  by  the  Government,  and  re- 
duced their  charges  to  shippers  to  the  extent  of  over  $140,- 
000,000,  or  nearly  $8,000,000  per  year.  "  But,  he  says, 
they  chose  dishonest  methods.  At  the  outset  they  di- 
vided $172,000,000  of  fictitious  capital ;  they  dissipated  over 
$107,000,000,  which  should  have  been  applied  to  the  payment 
of  the  principal  and  interest  of  the  Government  debt ;  and 
they  taxed  shippers  to  the  extent  of  $140,000,000,  or  nearly 
$8,000,000  per  year,  to  pay  interest  upon  the  fictitious  cap- 
ital of  these  companies,  and  for  the  vicious  practices  that  crept 
into  their  management." 

The  people  of  the  State  of  California  find  now,  at  the  end 
of  nearly  thirty  years,  since  the  inauguration  of  this  enter- 
prise, that  their  side  of  the  account  stands  thus:  Thej'  have 
paid  much  the  larger  portion  of  the  $140,000,000  in  the 
shape  of  freight  rates  to  pay  interest  upon  the 
fictitious  and  inflated  capital.  In  addition  to  this,  the  roads, 
by  the  payment  of  $25,000,000  for  pools  and  rebates,  have  kept 
up  freight   rates  to  an  exhorbitant   and   unreasonable   figure. 


— 9— 

Among  other  items,  they  have  paid  $4,000,000  alone  to  the 
Pacific  Mail  Steamship  Company,  in  order  to  maintain  high 
rates  of  freight  by  the  ocean  route. 

The  People  of  this  State  have  made  frequent  attempts  to 
ameliorate  their  condition,  and  to  regulate  freights  and  fares, 
and  to  compel  the  railroad  company  to  deal  with  them  justly. 
How  utterly  they  have  failed  in  all  these  attempt  is  useless  for 
me  to  state;  it  is  a  fact  well  known  to  every  Californian.  The 
only  result  of  these  efforts,  so  far  apparent,  has  been  the  build- 
ing up  by  the  railroad  company  of  a  political  power  in  this 
State,  which  has  dominated  and  controlled  it  for  nearly  a  gen- 
eration. In  1880,  the  people  attempted  to  inaugurate  a  meas- 
ure of  control  b}'-  the  establishment  of  a  railroad  commission, 
and  since  that  period,  with  the  two  shining  exceptions  of 
Stoneman  and  Foote,  the  railroad  company  has  practically 
controlled  this  commission.  It  has  refused  to  pay  its  taxes, 
though  the  largest  propert}^  owner  in  the  State,  and  one  for 
w^hose  protection  the  greatest  public  expense  is  incurred. 
Four  years  ago,  in  anticipation  of  the  falling  due  of  these 
debts,  and  with  the  desire  and  intention  of  having  a  represen- 
tative of  its  interests  in  Congress,  it  caused  to  be  elected  by 
the  Republican  party  its  own  President,  and  one  of  the  orig- 
inal syndicate,  Mr.  Iceland  Stanford,  to  the  position  of  United 
States  Senator  from  California,  whose  term  of  office,  had  he 
lived,  would  have  extended  over  the  period  during  which  Con- 
gress would  be  called  upon  to  settle  the  question.  During  the 
campaign  in  which  Mr.  Stanford  was  elected  to  that  position, 
Mr.  Morris  M.  Estee  was  one  of  his  most  vigorous  supporters; 
and  his  election  cannot  be  otherwise  construed  than  as  a  decla- 
ration of  allegiance  by  the  political  managers  of  that  party  to 
the  great  corporation  over  which  he  presided. 

And  to-day,  realizing  to  its  full  extent  the  significance  to 
itself  of  the  result  of  the  present  election,  the  Southern  Pacific 
Company  has  re-organized  its  political  bureau,  and  recalled 
from  retirement  and  repose  the  arch-manipulator,  whose  hand 
has  been  so  potent  in  its  behalf  in  the  past,  Mr.  W.  W.  Stow, 
under  whose  silent  guidance  Mr.  Daniel  M.  Burns  has  been 
put  in  command  of  the  Republican  campaign  in  this  State. 
Thus,  with  the  assistance  of  the  discarded  Democratic  "boss," 
Mr.  Christopher  Buckley,  (for  many  years  believed  to  have 
been  upon  the  pay-roll  of  the  Company,)  it  has  seized  the  Re- 
publican organization,  nominated  a  State  and  Congressional 
ticket,  and  compelled  the  honest  members  of  the  Republican 
party  to  choose  between  a  partisan  defeat  and  a  victory  for  the 
use  and  benefit  of  the  railroad  company. 

•  The  method  proposed  in  the  platform  of  the  Democratic 
party  for  an  settlement  of  this  railroad  question  constitutes  a 
clear  and  distinct  issue.     The  Republican  platform  is  absolutely 


lO — 

silent  upon  the  question.     The  Democratic  platform  declares  as 
follows : 

Whereas,  Any  extension  of  time  for  payment  to  the  Govern- 
ment of  the  Pacific  Railroad  debts  by  the  so-called  Reilly  funding  bill, 
or  any  other  bill  having  a  similar  object,  would  entail  upon  the  people 
of  this  State  the  principal  burden  of  discharging  said  debts,  and  result 
only  in  conferring  additional  benefits  upon  the  private  ovmers  of  said 
roads  ;  and. 

Whereas,  The  experience  of  the  past  has  demonstrated  the  inability 
or  disinclination  of  said  roads  to  discharge  their  just  obligations ;  and, 

Whereas,  Every  principle  of  justice  and  expediency  demands  that 
the  mortgage  bonds  of  said  roads  should  be  paid  or  foreclosed  at  maturity  ; 
therefore, 

Resolved,  That  each  and  every  one  of  our  nominees  for  Congress 
shall  immediately  after  his  nomination  subscribe  to  and  deposit  with 
the  Chairman  of  the  State  Central  Committee  a  written  pledge  in  the 
following  words  :  "If  elected  to  Congress  I  will  oppose  any  attempt  and 
vote  against  any  bill  to  extend  the  time  for  payment  to  the  Government 
of  Pacific  Railroad  debts,  and  I  will  favor  and  vote  for  a  measure  to  fore- 
close at  maturity  the  lien  of  the  Government  on  these  roads,  and  to  have 
them  bid  in  by  the  Government,  and  maintained  as  national  highways- 
for  the  benefit  and  interest  of  the  people,  and  to  enforce  against  the 
stockholders  of  said  roads  the  collection  of  any  judgment  for  deficiency 
that  may  result  upon  said  foreclosure  ;  and  I  will  favor  and  vote  for  all 
legislation  necessary  to  effectuate  these  ends." 

It  is  true  that  Mr.  Estee  has  declared  that,  notwithstanding 
the  omission  in  his  own  platform,  he  is  in  favor  of  compelling 
the  payment  of  the  Government  debts,  and  if  necessary  of  tak- 
ing the  roads  ;  but  that  this  is  not  the  sentiment  of  other  lead- 
ers of  the  party  is  shown  by  the  fact  that  Mr.  Grove  L.  John- 
son, its  noininee  for  Congress  in  the  Sacramento  District,  the 
reputed  author  of  its  platform,  and  a  gentleman  who  is  con- 
fessedly one  of  the  first  of  the  Republican  leaders  in  this 
State,  declared,  in  a  speech  at  Sacramento  the  other  day,  that 
while  he  was  in  favor  of  compelling  the  payment  of  the  rail- 
road debt,  he  was  not  in  favor  of  the  Governmental  ownership 
of  railroads  ;  that  it  was  not  practicable ;  that  he  did  not  want 
the  Government  to  go  into  the  business  of  owning  railroads, 
unless  it  was  absolutely  necessary.  And  Mr.  James  McLach- 
lan,  its  nominee  in  the  Sixth  District,  only  goes  so  far  as  to 
declare  (I  quote  from  his  speech  at  Ventura):  "All  of  the 
parties  are  agreed  that  that  debt  must  be  paid  without  delay. 
This  is  the  position  taken  by  the  Republican  party  ;  it  is  the 
position  urged  by  Mr.  Estee  ;  and  I  say,  as  the  Republican 
nominee  from  this  District,  that  the  railroads  must  pay  with- 
out delay."  But  nowhere  does  he  suggest  how  this  is  to  be 
accomplished. 

The  Democratic  position,  upon  the  other  hand,  is  clear  and 
emphatic  in  pointing  out  the  remedy  which  must  be  adopted, 
and  that  remedy  consists  in  the  foreclosure  of  the  lien  of  the 
Government  on  these  roads,  and  the  buying  them  in  by  the 
Government,  to  be  maintained  thereafter  as  national  highways 


— II — 

for  the  benefit  and  in  the  interest  of  the  people  ;  and  in  enforcing 
against  the  stockholders  and  fraudulent  directors  the  judgment 
for  deficiency. 

The  plan  suggested  is  for  the  Government  to  retain  the 
ownership  of  the  railroads,  and  to  maintain  them  as  common 
highways  for  all  railroad  companies  that  may  desire  to 
pass  their  trains  over  them,  subject  to  proper  regulations  gov- 
erning the  passage  of  trains,  and  upon  terms  which  would  pay 
a  reasonable  interest  upon  the  actual  value  of  the  road,  and 
not  upon  a  fictitious  value.  The  result  of  this  plan,  (of  which 
I  do  not  enter  into  the  details)  would  be  to  establish  what 
twenty  years  of  legislative  attempts  at  railroad  control  has 
failed  to  effect.  It  would  regulate  the  rates  of  freight  upon  all 
other  transcontinental  roads.  It  would  compel,  for  instance,, 
the  Southern  Pacific  Company  to  reduce  its  rates  over  its  South- 
ern Pacific  line  to  an  extent  which  would  pay  interest  only 
upon  the  actual  value  of  the  road;  which  could  be  dupli- 
cated today  for  about  one-third  of  the  amount  at  which  it  is 
capitalized.  The  bonds  and  stock  of  the  Southern  Pacific 
Railroad  Companies  average  over  $70,000  per  mile  of  road  ; 
and  it  is  to  pay  interest  upon  this  fictitious  valuation  that  the 
shippers  of  California  are  charged  freight  rates  which  have 
brought  the  agricultural  and  industrial  aflairs  of  this  State  to 
the  verge  of  runin.  In  my  own  neighborhood,  in  the  San 
Gabriel  Valley,  two  years  ago,  the  average  rate  of  freight  per 
acre  for  all  the  orange  orchards  paid  to  convey  the  crop  to 
market,  was  $250  ;  and  one  orchard  of  eight  acres  in  that  year 
actually  paid  $648  per  acre  in  freight  rates  to  move  its  orange 
crop.  The  amount  of  reduction  which  would  be  implied  in 
a  freight  rate  based  upon  the  actual  value  of  the  railroad,  in- 
stead of  its  present  inflated  value,  would  reduce  these  rates 
at  least  two-thirds  or  66  per  cent. ;  and  the  producers  of  Cali- 
fornia know  full  well  that  the  time  has  come  when  we  must 
not  only  have  a  reduction  of  freight  rates,  but  we  must  have 
a  very  radical  reduction  of  them,  in  order  to  survive. 

The  remedy  proposed  by  the  Democratic  platform,  is  to 
bid  in  the  roads,  and  to  docket  a  deficiency  judgment  for  the 
balance  of  the  debt;  and  in  pursuance  of  this  polic>' 
the  Democratic  attorney  general  has  already  filed  his 
claim  against  the  estate  of  Mr.  Iceland  Stanford  for 
$15,000,000,  and  that  suit  will  doubtless  be  pushed  by  the 
Democratic  administration  to  a  successful  conclusion.  Upon 
the  same  principle,  suits  will  be  instituted  at  the  proper  time 
against  the  other  stockholders  and  fraudulent  directors  of  that 
company,  for  their  proportionate  shares  of  the  immense  de- 
ficiency judgment  which  will  result  in  favor  of  the  United 
States  after  the  foreclosure.  The  issue,  then,  is  clear  and  dis- 
tinct.    Are  Mr.  Estee  and  Mr.  McLachlan,  and   other   candi- 


—  12— 

dates  upon  the  Republican  ticket,  prepared  to  adopt  the  con- 
clusion of  the  Pacific  Railway  Commissioners,  and  declare  that 
Messrs.  Huntington,  Stanford,  Crocker  and  Hopkins  have 
been  guilty  of  a  fraudulent  conversion  of  the  assets  of  the  com- 
pany of  which  they  were  directors?  Will  the  Congress- 
ional nominees  of  the  Republican  party  pledge  themselves  to 
vote  for  all  necessary  legislation  to  prevem  these  individuals 
from  parting  with  their  portable  assets  pending  a  settlement  of 
this  question,  and  to  enforce  the  collection  of  the  Government 
debt  against  their  personal  estates.  And  will  they  vote 
against  the  proposition  of  Senator  Hoar,  of  Massachusetts, 
which  proposes  to  remit  the  Government  claim  to  the  Stanford 
estate,  and  necessarily  to  remit  by  so  doing  its  claim  against 
the  other  members  of  the  syndicate? 

Mr.  Kstee  undertakes  to  explain  the  silence  of  his  party 
platform  by  stating  that,  at  the  date  of  its  adoption,  the  Reilley 
bill,  proposing  to  extend  the  time  of  payment,  had  not  been 
reported.  To  make  this  plea  successful,  Mr.  Estee  must  plead 
an  ignorance  of  public  questions  of  which  no  one  who  knows  his 
ability  can  believe  him  capable.  The  question  of  the  disposi- 
tion of  this  railroad  debt  has  been  a  live  one  for  at  least  four 
years,  and  during  the  last  campaign,  when  Mr.  Estee  was 
stumping  the  State  for  Stanford,  it  was  repeatedly  and  openly 
charged  that  Mr,  Stanford's  desire  to  go  to  the  Senate  arose 
from  the  fact  that  his  Company  wanted  a  representative  in  that 
body  when  this  question  of  the  railroad  debt  should  come  up, 
as  it  necessarily  would  during  his  term  of  office. 

In  connection  with  the  question  of  Government  ownership, 
I  may  remark  that  the  idea  of  ownership  of  certain  trunk  lines 
of  railroad  by  the  Government  is  not  a  new  one.  More  than 
twenty  years  ago,  a  commission  of  the  Senate  was  appointed  to 
investigate  the  subject  of  transportation  between  the  Missis- 
sippi Valley  and  the  sea-board,  with  a  view  to  regulating  the 
rates  of  freight  and  fare,  and  was  charged  specially  with  the 
consideration  of  two  alternative  plans,  the  one  of  a  railroad 
operated  by  the  Government,  and  the  other  of  a  line  of  water 
communication.  They  reported  in  favor  of  the  latter,  and 
recommended  the  improvement  of  the  Ohio  and  Mississippi 
rivers,  and  the  construction  of  a  canal  from  the 
Kanawha,  to  the  James  river,  at  an  estimated  cost 
of  about  |6o,ooo,ooo.  Such  a  line  of  communica- 
tion, they  reported,  would  effectuallj^  regulate  the  rates  of 
freight  from  the  Mississippi  to  the  sea-board;  and  it  was  their 
opinion,  based  upon  the  experience  of  the  Erie  canal,  that  the 
saving  in  freights  upon  the  wheat  crops  of  a  few  years  would 
more  than  repay  the  whole  amount  invested.  In  the  East,  un- 
der the  influence  of  a  number  of  competing  roads  and  markets, 
freights  and  fares  have  been  more  or   less  effectually  regulated, 


—13— 

but  West  of  the  Mississippi,  the  case  is  entirely  different. 

It  is  well  also  to  remember  that  Mr.  Budd,  now  the  Demo- 
cratic nominee  for  Governor,  twelve  years  ago,  when  a  mem- 
ber of  Congress,  ably  advocated  the  Government  ownership  of 
these  very  Pacific  roads,  thus  blazing  the  way  for  the  position 
now  assumed  by  the  party. 

The  adoption  of  the  plan  outlined  and  suggested  by  the 
Democratic  platform,  and  to  which  its  nominess  are  pledged, 
will  undoubtedly  result  in  the  immediate  construction  of 
another  railroad,  connecting  the  main  line  at  Ogden,  and  run- 
ning thence  through  Salt  Lake  City,  traversing  the  great  coal 
fields  of  South  Utah  and  reaching  a  deep  water  terminus  upon 
the  coast  of  Southern  California.  And  this  brings  me  to  the 
consideration  of  another  question  of  vital  importance  to  the 
people  of  this  district  in  particular,  and  of  California  as  a  whole, 
and  that  is  the  question  of  the  location  of  a  deep-sea  harbor. 
As  is  well  known,  for  a  number  of  years  the  Southern  Pacific 
Company  had  its  terminus  upon  this  coast  at  San  Pedro.  Dur- 
ing this  period  it  acquired  the  ov/nership  of  the  Santa  Monica 
road  and  wharf,  which  had  been  constructed  by  Senator  Jones 
of  Nevada,  with  the  audacious  view  of  entering  into  competi- 
tion with  the  Southern  Pacific  Company.  Upon  the  acquisition 
of  this  road  and  wharf,  the  first  step  of  the  Southern  Pacific 
Company  was  to  suffer  the  wharf  to  be  destroyed  and  to  con- 
centrate all  of  its  cpmmercial  business  at  San  Pedro.  It  then 
began  to  urge,  both  here  and  in  Congress,  the  construction  of 
an  adequate  harbor  at  San  Pedro.  The  people  of  Southern 
California  unanimously  concurred  with  it  in  this  desire,  and 
rejoiced  that  the  interests  of  this  great  corporation  were  for  once 
consonant  with  their  own  ;  and  the  result  was,  that  the  Gov- 
ernment finally  determined  to  build  such  a  harbor,  and  in  1890 
a  commission  of  engineers  reported  the  detailed  plans  and  speci- 
fications for  a  deep-sea  harbor  at  San  Pedro,  stating  that  such  a 
harbor,  taken  in  connection  with  the  present  inner  harbor  at 
that  point,  which  had  been  constructed  by  the  Government  at  a 
cost  of  nearly  a  million  dollars,  would  supply,  for  all  future 
time,  adequate  harbor  facilities  for  the  southwest  portion  of  the 
United  States.  Acting  upon  the  assumption  that  the  construc- 
tion of  this  harbor  would  begin,  Eastern  capital  sought  an 
investment  here,  and  a  corporation  was  organized,  purchased 
adequate  terminal  facilities  at  the  proposed  harbor,  and  con- 
structed, at  a  cost  of  several  million  dollars,  a  railroad,  con- 
necting the  same  with  the  city  of  Los  Angeles  ;  and  this  road 
constitutes,  and  was  designed  to  constitute,  a  railroad  terminal 
for  other  competing  transcontinental  railroads.  As  soon  as  this 
was  done,  an  entire  change  came  over  the  spirit  of  the 
Southern  Pacific  Company.  It  first  secured  the  con- 
trol   by    itself    and     Senator    Jones    of    Nevada,    who    is    a 


—14 

member  of  the  Senate  Committee  on  Commerce,  of  the 
whole  ocean  front  of  the  bay  at  Santa  Monica.  When  this 
was  done,  it  declared  that  San  Pedro  was  not  a  proper  site  for 
a  harbor,  and  that  if  one  was  to  be  constructed  by  the  Govern- 
ment," its  new  location  at  Santa  Monica  was  the  only  place 
suitable ;  and,  thus  by  its  ofi&cious  interference,  as  was  ex- 
pressly asserted  by  Senator  Felton,  it  prevented  an  appropria- 
tion, which  would  otherwise  have  been  made  several  years  ago. 
It  requested  the  appointment  of  another  commission  to  exam- 
ine and  report  upon  the  relative  merits  of  San  Pedro  and  the 
new  Santa  Monica  location.  That  commission  was  appointed, 
consisting  of  five  of  the  first  engineer  officers  of  the  United 
States  army  ;  and,  after  a  thorough  and  critical  examination 
it  unanimously  reported  in  favor  of  the  location  at  San  Pedro. 
It  declared  that  that  site  was  superior  to  the  site  at  Santa  Mon- 
ica, in  almost  every  respect,  both  as  regards  its  adaptability  as 
a  harbor,  and  its  defensibility  in  case  of  war.  It  pointed  out  the 
fact  that  at  Santa  Monica  it  was  necessary  to  construct  wharves 
nearly  5000  feet  long,  and  at  a  cost  of  about  $1,000,000  each 
to  reach  a  depth  of  water  suflGicient  for  the  accommodation  of  a 
deep-sea  vessel  ;  that  such  wharves  would  have  to  be  maintained 
and  practically  rebuilt  every  few  years,  at  enormous  cost,  and 
that  the  rates  of  wharfage  and  toll  would  necessarily  be  placed 
at  a  figure  to  cover  all  this  expense,  and  would  hence  be  paid 
by  the  people.  Whereas,  at  San  Pedro,,  the  breakwater  pro- 
posed to  be  built  communicated  directly  with  the  shore,  and  the 
plan  was  suggested  that  upon  this  breakwater  a  double 
track  railroad  should  be  built,  and  that  along  the  whole  of 
its  face  numerous  wharves  could  be  constructed  at  small 
cost  for  construction  and  maintenance,  connected  by 
proper  switching  facilities,  with  the  railroad  track  upon  the 
breakwater  itself ;  which  would  insure  the  people  what  they  de- 
sire— competition.  In  addition  to  this,  in  the  opinion  of  the 
Engineers,  one  of  the  most  essential  adjuncts  of  a  harbor  was 
an  area  of  flat  and  marshy  land  adjoining  it,  which  might  be 
utilized  by  dredging  for  the  construction  of  dry-docks,  ship- 
yards, and  repair  shops.  A  condition  that  existed  in  an  em- 
inent degree  at  San  Pedro,  and  was  entirely  wanting  at  Santa 
Monica.  Numerous  other  advantages  of  the  former,  over  the 
latter  location,  were  also  pointed  out  by  the  Commissioners — 
as  for  instance:  the  obvious  advantage  of  the  inner  harbor 
already  constructed,  and  the  greater  depth  of  water  near  the 
shore,  and  the  larger  protected  area. 

Notwithstanding  this  report,  which  had  been  requested  by  it, 
the  Southern  Pacific  Company  has  refused  to  abide  by  the  re- 
commendation of  the  Commission;  and  during  the  last  session 
of  Congress,  Mr.  C.  P.  Huntington  in  person,  and  assisted  by 
his  resident  lobbyist  in  Washington,  and  by  a  labored  argument 


—15— 

volunteered  by  one  Mr.  E-  E.  Corthell — who  admitted  that  he 
was  in  the  employ  of  Mr.  Huntington,  and  whose  testimony  is 
therefore  simply  that  of  a  hired  expert — after  weeks  of  effort 
finally  succeeded  in  again  delaying  the  commencement  of  this 
work  which  is  so  essential  to  the  prosperity  of  this  people.  As 
a  delegate  trom  the  Chamber  of  Commerce  I  was  before  that 
committee,  and  it  is  my  opinion  from  what  I  there  saw,  that 
the  Southern  Pacific  Company  and  Mr.  Huntington  do  not  de- 
sire the  construction  of  a  deep-sea  harbor  upon  this  coast  at  all, 
for  at  least  some  years  to  come;  auvi  they  are  resolved  it  shall 
be  constructed  at  a  point  which  is  controlled  and  monopolized 
by  themselves,  and  otherwise  not  all. 

The  question  then  is,  do  the  people  of  this  State  desire  to 
entrust  the  solution  of  the  pending  questions  of  a  Government 
highway  across  the  continent,  and  of  a  free  harbor  for  the 
people  to  the  nominees  of  a  party  whose  platform  is  silent  upon 
both  points  ;  whose  controlling  spirit  is  Mr.  Daniel  Burns  of 
San  Francisco  ;  and  who  four  short  years  ago  actually  sent  to 
the  Senate  of  the  United  States  as  its  chosen  representative  the 
president  of  the  great  corporation  whose  interests  are  involved. 
Is  it  not  possible  that  the  honest  members  of  the  Republican 
party  —  and  by  that  I  mean  the  whole  mass  of  the  party,  leav- 
ing out  its  present  corrupt  leadership — are  being  deceived  upon 
this  question  ;  or  at  least  that  their  leaders  are  seeking  to  de- 
ceive them'? 

My  belief  is,  that  the  time  has  come  when  the  people 
of  California  must  shake  from  their  limbs  the  shackles 
of  the  commercial  slavery  imposed  upon  them  by  this  corpor- 
ation, or  consent  that  hereafter  they  shall  remain  at  sufferance 
upon  territory  owned  by  it.  Many  conservative  men  declare 
that  they  fear  the  inauguration  of  a  step  so  radical  as  the  owner- 
ship of  the  railroads  by  the  Government.  But  there  are  occa- 
sions when  new  conditions  must  be  met  by  new  remedies. 
There  is  but  one  safe  rule  to  follow  in  this  matter,  and  that  is 
that  the  welfare  of  the  people  is  the  supreme  law ;  and 
that  whatever  our  general  views  of  expediency  in  regard 
to  minor  matters,  such  as  the  operation  of  the  railroads,  or 
other  industrial  enterprises,  by  the  Government,  they  must  give- 
way  to  the  higher  principle  when  necessity  demands.  If  the 
people  of  the  State  of  California  are  in  earnest,  and  mean  what 
they  have  said  by  their  signature  to  the  great  petition  which 
has  been  circulated  against  the  refunding  of  the  railroad  debt, 
they  will  seize  this  opportunity,  which  is  the  first  chat  has 
been  presented  in  many  years,  and  which  may  be  the  last  for 
years  to  come,  and  shake  off  their  fetters.  If  they  do  this, 
with  the  construction  of  other  roads  which  shall  connect  with 
this  new  Government  road,  the  State  of  California  will  be  made 
the  terminus  of  all  roads  to  the  East ;    and,  with  the  construe- 


i6— 

tion  of  the  Nicaragua  Canal — which  is  regarded  as  a  mere  ques- 
tion of  time — and  with  a  free  and  unrestricted  harbor  open  to 
the  commercial  competition  of  all,  at  San  Pedro,  we  shall  enter 
upon  an  era  of  prosperity  far  greater  and  more  lasting  than 
that  which  was  enjoyed  when  the  gold  mines  of  California 
were  pouring  out  their  countless  streams  of  wealth.  If  this  is 
done,  then  ourselves  and  future  generations  will  be  entitled  to 
celebrate  this  event  as  one  of  the  most  glorious  epochs  in  our 
history. 

Your  Obedient  Servant, 

GEO.   S.    PATTON. 


THE 

PACIFIC    RAILROAD    COMPANIES 


THEIR  METHODS    OF    CONSTRUCTION    AND    FINAN 
CIAL  MANAGEMENT 


AND 


THEIR  INDEBTEDNESS  TO  THE  UNITED  STATES  AND 
PRESENT  FINANCIAL  CONDITION 

AS  SHOWN  BY  THE 

REPORTS  OF  THE  UNITED  STATES  PACIFIC  RAILWAY 

COMMISSION,  APPOINTED  BY  PRESIDENT 

CLEVELAND  UNDER  THE  ACT  OF 

CONGRESS  OF  MARCH  3,  1887, 


WITH 


OBSERVATIONS  UPON  THE  LEGAL  REMEDIES  OF  THE  GOVERN- 
MENT FOR  THE  Recovery  of  the  Money  Due 
FROM  THE  Pacific  Railway  Companies. 


TABLE  OF  CONTENTS. 


INTRODUCTION Page  3 

I. 

HITSORY      OF      THE       CONSTRUCTION      AND      vSUBSKQUENT 
FINANCIAL  MANAGEMENT  OF  THE  PACIFIC  RAILROADS. 

(i)     Nature  and  Amount  of  Government  Aid   to   Construction 4 

( 2)  Methods   of  Construction : 7 

Their  General  Character 7 

Construction  of  Central  Pacific   R.  R.  and  Branches,  viz:...  8 

Main  line,  Sacramento  to  Ogden 8 

Western  Pacific  R.  R 6 

San  Joaquin  Valley  R.  R 10 

California  and  Oregon  R.  R 10 

Recapitulation 11 

Construction   of  Union    Pacific  R.  R.  and  Branches,  viz: 13 

Construction  of    Central  Branch  of    U.  P.  R.  R 14 

Construction   of  Sioux  City  &  Pacific  R.  R 15 

Comparison   of  Capitalization   snd  Actual    Cost    of  Pacific 

Railroads  generally 15 

Unauthorized  Issue  of  Stock 17 

(3)  Subsequent  Financial  Management  of  Pacific  Railroads 17 

II. 

INDEBTEDNESS    OF   THE    PACIFIC   RAILROAD   COMPANIES 

TO  THE  GOVERNMENT  AND  THEIR  PRESENT 

FINANCIAL  CONDITION. 

(r)     Indebtedness  to   Government 18 

(2)  Liabilities  generally 19 

(3)  Assets 19 

III. 

LEGAL   REMEDIES  OF  THE  GOVERNMENT  FOR  THE  RE- 
COVERY OF  ITS  DEBT 2T 


INTRODUCTION. 

In  the  year  1887,  an  Act  of  Congress  was  passed  "  author- 
izing an  investigation  of  the  books,  accounts  and  methods  of 
railroads  which  have  received  aid  from  the  United  States,"  and 
providing  among  other  things  for  the  appointment  by  the 
President  of  a  Commission  for  that  purpose.  The  Commis- 
sioners appointed  were,  the  Hon.  Robert  E.  Pattison 
of  Pennsylvania,  the  Hon.  Ellery  Anderson  of  New 
York,  and  the  Hon.  David  T.  Littler  of  New  York,  gentlemen 
—  as  shown  by  their  reports  —  eminently  qualified  for  the  per- 
formance of  the  difficult  and  responsible  duties  assigned  to 
them.  By  these  gentlemen,  and  an  able  corps  of  expert 
accountants  and  railroad  men.  a  protracted  and  exhaustive  in- 
vestigation was  made  ;  and  their  reports  made  in  accordance 
therewith  may  be  regarded  as  constituting  the  only  complete 
and  authentic  history  of  the  bond-aided  railroad  companies. 

These  reports  consist  of  a  majority  report  by  Messrs. 
Anderson  and  Littler,  and  a  minority  report  by  Governor  Pat- 
tison. The  former  recommends,  in  substance,  an  extension  of 
the  time  of  payment,  upon  certain  conditions,  for  the  term  of 
fifty  years  ;  the  latter,  a  suit  for  the  forfeiture  of  the  charters 
of  the  companies,  and  a  winding  up  of  their  affairs.  Neither 
scheme  was  adopted  by  Congress,  and  the  whole  matter  fell 
into  abeyance  until  the  introduction  of  the  bill  now  pending  in 
Congress,  which  in  effect  provides  for  an  extension  of  time  for 
payment  for  fifty  years,  and  a  reduction  of  the  interest  to  three 
per  cent. 

The  magnitude  of  the  interests  involved  in  this  bill  —  as 
affecting  the  public  generally  and  more  especially  the  people  of 
the  trans- Mississippi  States  —  renders  it  perhaps  the  most 
vitally  important  measure  —  at  least  to  the  latter — that  Con- 
gress has  ever  had  to  pass  upon ;  and  on  this  account,  the 
reports  of  the  Commissioners  have  come,  at  the  present  time, 
to  have  a  peculiar  value,  as  being  the  only  record  —  or  at  least 
the  only  accessible  record — of  the  facts  by  which  the  justice 
and  expediency  of  the  proposed  bill  are  to  be  judged. 
Unfortunately,  a  few  copies  only  of  the  report  remain  extant ; 
but  the  following  compilation,  it  is  believed,  will  present  fully 
all  that  is  material  to  the  questions  pending  between  the  Gov- 
erntLent  and  the  companies. 


— 4— 

The  majority  and  the  minority  reports  of  the  Commission, 
though  differing  in  the  methods  of  adjustment  proposed  and  in 
arrangement,  in  other  respects  agree,  substantially,  with  each- 
other,  and  contain  much  the  same  matter.  To  avoid  repetition, 
the  two  reports  will  be  consolidated  in  this  compilation  ;  and 
the  subjects  treated  of  will  be  distributed  in  the  following  order  : 

(i)  History  of  the  construction  and  of  the  subsequent 
financial  management  of  the  Pacific  railroads. 

(2)  Statement  of  their  indebtedness  to  the  United  States, 
and  of  their  present  financial  condition. 

(3)  The  legal  remedies  of  the  Government  for  the  recov- 
ery of  the  debt. 


HISTORY   OF   THE   CONSTRUCTION,    AND   OF  THE 

FINANCIAL  MANAGEMENT  OF  THE 

PACIFIC   RAILROADS. 


(i)     NATURE  AND    AMOUNT   OF    GOVERNMENT   AID   TO  THE 

COMPANIES. 

The  Pacific  Railroad  Companies  that  have  received  aid 
from  the  Government  —  as  they  now  exist  —  consist  of  : 

The  Central  Pacific  Railroad  Cottipany,  with  which  the 
Western  Pacific  Railroad  Company  has  been  consolidated,  and 
its  several  branches. 

The  Union  Pacific  Raihoad  Company,  with  which  the 
Kansas  Pacific  Railroad  Company  and  the  Denver  Pacific  Rail- 
road Company  have  been  consolidated,  and  its  several 
branches,  and 

The  Cefitral  Braiich  Union  Pacific,  and  the  Sioux  City  and 
Pacific  Railroad  Companies;  which,  being  of  comparatively  lit- 
tle importance,  will  not  require  much  of  our  attention. 

All  these  roads  were  constructed  under  the  Act  of  Congress 
of  July  ist,  1862  (12  Stat.,  489),  and  the  Amendatorv  Act  of 
fuly  2,  1864  (13  Stat.,  356). 

By  the  Act  of  1862,  there  was  granted  to  each  of  the  bond 
aided  companies,  in  aid  of  construction,  the  right  of  way  and 
ten  sections  of  public  lands  for  each  mile  of  completed  road  ; 
and  it  was  also  provided  that  there  should  be  issued  to  the 
companies,  for  each  section  of  forty  miles  of  completed  road, 
bonds  of  the  United  States  of  $1,000  each,  payable  thirty  years 
from  date,  with  interest  at  six  percent.,  payable  semi-annually, 
to  the  amount  of  $16,000  per  mile.  These  bonds,  b}-  the  pro- 
visions of  the  bill,  were,  ipso  facto,  upon  their  delivery,  to  con- 
stitute a  first  mortgage  upon   the  roads  and  equipment  of  the 


— 5— 

companies  to  secure  the  payment  to  the  U.  S.,  at  maturity,  of 
the  principal  of  the  bonds,  and  also  of  the  amounts  paid  by 
the  Government  as  interest  thereon  ;  and  the  earnings  of  the 
roads  from  the  Government,  for  telegraph  and  transportation 
services,  and  also,  after  completion,  five  per  cent,  of  the  net 
earnings,  were  to  be  applied  to  the  payment  of  the  indebted- 
ness of  the  companies  to  the  Government. 

By  the  Act  of  1884,  this  Act  was  amended  so  as  to  require 
only  one-half  of  the  compensation  earned  by  the  roads  from  the 
Government  to  be  applied  to  the  debt ;  and  also,  so  as  to  per- 
mit the  companies 'to  issue  first  mortgage  bonds  on  their  roads 
and  equipment  equal  in  amount  to  the  bonds  received  from  the 
Government,  and  constituting  a  prior  lien  thereto. 

The  aggregate  amount  of  pecuniary  aid  received  by  the 
Pacific  Railroad  Companies  under  these  Acts  is  stated  by  Gov- 
ernor Pattison,  in  his  minority  report,  to  be  $447,729,470.54, — 
as  will  appear  from  the  following  table,  compiled  from  the 
tables  given  by  him  : 

Principal  of  subsidy  bonds $  64,623,512.00 

Interest,  at  6  per  cent.,  accrued  and  to  accrue  to 
date  of  maturity 114,261.247,50 

Use  until  maturity  of  annual  interest  payments, 
without  interest,  calculated  on  a  basis  of  six  per 
cent 199,790,250.19 

Valueof  land  grants,  sold  and  unsold 65,983.583.61 

Aid  from  other  sources 3,077,877.24 

Total $447,729,470  54 

Deducting  from  this  the  total  amount  of  the  "  aid 
from  other  sources  " 3,077.877.24 

There  remains $444,651,593.30 

Which  constitutes  the  value  of  the  land  and  money  grants 
alone.       (Rep.  pp.  134-5)- 

In  explanation  of  the  item,  "  Use  until  maturity  of  annual 
interest  payments,"  etc.,  it  is  to  be  observed  that  it  was  decided 
by  the  Supreme  Court  of  the  United  States,  in  U.  S.  vs.  U.  P. 
R.  R.  Co.,  91  U.  S.,  72,  that  the  amounts  paid  by  the  Govern- 
ment on  account  of  interest  were  not  to  be  paid  back  to  the 
Government  by  the  companies  until  the  maturity  of  the  princi- 
pal of  the  bonds  ;  and  it  is  assumed  by  the  Commissioner, 
(perhaps  incorrectl}^  v.  in/ra,  p.  19),  that  they  are  then  to  be 
repaid  without  interest, — thus  giving  to  the  companies,  for  an 
average  period  of  fifteen  years,  the  use,  without  interest,  of  all 
the  moneys  paid  by  the  Government  to  their  use  on  account  of 
interest  on  its  bonds. 

The  portion  of  the  above  amount  given  to  the  Central  Pa- 
cific Company  amounts  to  $183,055,892.36,  as  will  appear  from 
the  following  table  : 

Principal  of  subsidy  bonds $  27,855,680.00 

Interest  at  6  per  cent.,  accrued  and  to  accrue 49,248,924.41 

Use  until  maturity  of  annual  interest  payments 86,118,706.71 

Value  of  land  grants,  sold  and  unsold 19.832,581.24 

Total $183,055,892,26 


''Management  Contemplated  by   Congress  and  Methods  Actually 

Pursued. ' ' 

' '  Had  the  Pacific  railroads  been  built  and  managed  upon 
honest  methods,  had  the  Government  loan  been  properly  ap- 
plied, these  companies,  regarded  as  a  whole,  could  have  de- 
clared dividends  at  the  rate  of  six  per  cent,  per  annum  for  eigh- 
teen years  from  the  date  of  actual  completion  to  the  present 
time  upon  all  moneys  that  they  would  have  been  required  to 
pay  in  to  complete  and  equip  the  roads;  they  would  have  own- 
ed 2,495  miles  of  roads,  free  from  all  debt  and -worth  $124,600,- 
000,  upon  an  original  outlay  of  less  than  $34,490,381.44.  Three 
of  them,  the  Union  Pacific,  the  Central  Pacific  and  Central 
Branch,  could  have  repaid  every  cent  of  the  principal  and  in- 
terest advanced  by  the  Government  to  date,  and  could  have  re- 
duced their  charges  to  shippers  to  the  extent  of  ^140,000,000,- 
000,  or  nearly  $8,000,000  a  year.  For  one  dollar  the  stockhol- 
ders would  have  realized  $1.70  in  dividends  in  eighteen  years, 
and  $1.11  in  land  sales.  The  property  would  have  been  free 
from  debt;  and  for  every  dollar  they  have  invested,  the  stock- 
holders would  have  had  in  property,  $4;  so  that  in  eighteen 
years  each  dollar  would  have  yielded  $6. 18." 

"But  they  chose  dishonest  methods.  At  the  outset  they 
divided  $172,347,115  of  fictitious  capital;  they  dissipated  over 
$117,000,000  which  should  have  been  applied  to  the  payment 
of  the  principal  and  interest  of  the  Government  debt,  and  they 
taxed  shippers  to  the  extent  of  over  $140,000,000,  or  nearly 
$3,000,000  a  year  to  pay  for  the  inflation  of  the  capital  of  these 
companies,  and  for  the  vicious  practices  that  crept  into  their 
management.'' 

"The  Union  and  Kansas  Pacific  roads  (aided  portions) 
could  have  been  built  for  an  original  outlay  by  stockholders  of 
$17,021,488,  in  addition  to  the  Government  loan.  All  debts 
could  have  been  paid,  including  the  Government  debt,  princi- 
pal and  interest  to  December  31,  1886,  and  from  the  profits  of 
operating  the  roads,  and  from  land  sales,  aggregating  $176, - 
295,793.53,  the  stock  could  have  paid  regular  devidends  at  the 
rate  of  six  per  cent,  per  annum;  and  by  an  original  outlay  of 
$17,021,478,  which  the  law  required,  but  which  was  not  made, 
the  company  would  today  own  a  railroad  worth  at  least  $79,- 
000,000,  and  unsold  lands  worth  $14,004,240,  equalling  an 
appreciation  of  447  per  cent  in  eighteen  years,  while  shippers 
would  have  been  benefitted,  and  the  developments  of  tributary 
territory  encouraged  by  a  reduction  of  $85,130,845.49  in 
charges  for  transportation." 

"  In  the  Central  Pacific  for  $16,609,203.7601  stock  .subscrib- 
ed, which  should  have  been  paid  in  conformity  with  the  act  of 
Congress,  all  debts  could  have  been   wiped  out,  including  the 


Government  debt,  principal  and  interest;  the  stock  would  have 
paid  regular  dividends  at  the  rate  of  six  per  cent,  per  annum 
and  for  the  outlay  of  $16,609,203.76  the  company  would  today 
own  a  railroad  worth  at  last  $40,000,000,  and  unsold  lands 
worth  $12,500,000,  equalling  an  appreciation  of  over  206  per 
cent  in  eighteen  years,  while  shippers  would  have  been  bene- 
fitted by  a  reduction  of  over  $54,000,000  in  the  cost  of  tranvS- 
portation."     (p.    146.) 

*  5K  * 

"  Because  of  the  vicious  methods  actually  pursued  by  the 
bond-aided  companies,  the  government  has  been  defrauded  of 
the  bulk  of  its  advances;  shippers  have  been  taxed  to  the 
extent  of  over  $548,000,000  and  liabilities  to  the  amount  of 
$389,517,265  have  been  heaped  upon  the  properties."    (p.  147.) 

(2)     METHODS  OF  CONSTRUCTION. 
Their  General  Character, 

The  methods  of  construction  adopted  by  the  managers  of 
the  Pacific  Railroad  Companies,  as  will  be  seen  from  the  more 
detailed  statements  given  belo\/,  were,  in  all  cases,  substan- 
tially the  same.  All  the  roads  were  constructed  and  equipped 
under  contracts,  allowing  extravagant  compensation,  made  by 
the  directors  of  the  several  companies  with  auxiliary  construc- 
tion companies,  in  which  the  directors  were  themselves  the  sole 
parties  in  interest ;  or  —  leaving  out  of  view  the  fiction  of  inter- 
vening corporations  —  under  contracts  made  by  the  directors 
with  themselves,  under  which  their  compensation  was  fixed  at 
extravagant  rates. 

The  general  result  is  thus  described  by  the  commissioners : 

' '  The  explanation  of  the  constant  and  restless  discussion  and  inquiry 
which  has  for  years  pervaded  Congress,  the  press,  and  it  may  be  said  the 
whole  people  of  the  country,  in  relation  to  these  Pacific  Companies,  is 
certainly  due  to  the  fact  that  there  exists  a  settled  conviction  that,. by  the 
application  of  ingeniously  contrived  devices  in  the  construction  and  ope- 
ration of  these  railways,  the  bounty  of  the  Government,  intended  for  the 
support,  development  and  insurance  of  the  financial  strength  of  these 
corporations,  has  been  slowly  but  surely  filtered  into  the  pockets  of  a  few 
favorec^oflScers  and  managers,  who  have  not  scrupled  to  use  their  powers 
as  directors  and  trustees  for  their  own  personal  advantage. 

' '  It  was  the  purpose  of  Congress,  in  all  this,  to  provide  for  some- 
thing more  than  a  mere  gift  of  so  much  land,  and  a  loan  of  so  many 
bonds  on  the  one  side,  and  the  construction  and  equipment  of  so  many 
miles  of  railroad  and  telegraph  on  the  other.  The  United  States  was  not 
a  mere  creditor,  loaning  a  sum  of  money  upon  mortgages.  The  railroad 
corporation  was  not  a  mere  contractor,  bound  to  furnish  a  specified 
structure,  and  nothing  more.  The  law  created  a  body  politic  and  cor- 
porate, bound  as  a  trustee  so  to  manage  this  great  public  franchise  and 
endowments  that  not  only  the  security  for  the  great  debt  due  to  the 
United  States  should  not  be  impaired,  but  so  that  there  should  be  ample 
resources  to  perform  its  great  public  duties  in  time  of  commercial  disaster 


— 8— 

and  in  time  of  war."     (p.  49) . 

"  The  conclusion  reached  by  this  Commission,  based  upon  their  own 
examinations  of  the  officers  of  the  respective  companies,  upon  the  exam- 
ination- of  the  accounts  of  the  companies  by  the  experts  of  the  Commis- 
sion, and  upon  the  report  of  the  inspecting  engineer  of  the  Commission, 
is  that,  with  a  single  exception,  to  be  presently  noted,  (the  Union  Pacific, 
since  the  spring  of  1884),  all  of  the  duties  and  obligations  above  referred 
to  have  been  constantly  and  persistently  disregarded.  The  result  is,  that 
those  who  have  controlled  and  directed  the  construction  and  develop- 
ment of  these  companies  have  become  possessed  of  their  surplus  assets 
through  issues  of  bonds,  stocks  and  payments  of  dividends  voted  by 
themselves,  while  the  great  creditor,  the  United  States,  finds  itself  sub- 
stantially without  security  for  the  payment  of  its  loans."      (p.  50). 

These  observations  are  fully  substantiated  by  the  accounts 
of  the  methods  of  construction  pursued  by  the  managers  of 
the  several  companies,  as  detailed  in  the  report,  which  are  as 
follows  : 

Construction  of  the  Central  Pacific  R.  R.  ajid  Bfanches. 

The  management  of  this  company  has  continued  un- 
changed throughout  its  history,  except  of  late  years  by  the 
death  of  members  of  it,  and  the  substitution  of  their  personal 
representatives.  It  consisted  of  Stanford,  Crocker,  Hopkins 
and  Huntington,  who,  with  five  others,  representing  them, 
were  directors  of  the  Central  Pacific  Railroad  Company. 

Mai7i  Line  —  Sacramento  to  Ogden.     (pp.  68-76). 

The  portion  of  this  line  ftom  Sacramento  to  the  Eastern 
boundry  of  the  State  was  constructed  by  Charles  Crocker  & 
Company,  in  which  Stanford,  Crocker,  Hopkins  and  Hunting- 
ton were  equally  represented.  Under  the  construction  con 
tracts,  payments  were  to  be  made,  five-eighths  in  cash,  and 
three-eighths  in  stock,  at  50  cents  on  the  dollar,  or  by  a  subse- 
quent modification  at  30  cents  on  the  dollar. 

From  the  State  line  to  its  terminus,  five  miles  we.st  ot 
Ogden,  with  the  exception  of  a  small  section  of  the  road  pur- 
chased from  iht  Union  Pacific  Railroad  Company,  the  railroad 
was  constructed  by  a  corporation  known  as  the  Contract  and 
Finance  Company,  which  had  succeeded  Crocker  &  Company, 
and  in  which  the  sole  parties  in  interest  were  the  four  directors 
named,  and  one  F.  B.  Crocker,  whose  interest  was  subse- 
quently assigned  to  the  four  other  parties.  The  terms  of  the 
contract  were  substantially  $86,000  per  mile,  one-half  payable 
in  cash,  the  other  one-halt  payable  in  stock,  for  the  construc- 
tion and  equipment  of  the  road  "  Under  this  contract,  the 
road  was  constructed  between  the  points  indicated,  a  total  dis- 
tance of  five  hundred  and  fifty-two  miles,  at  a  cost  of 
$^3,726,000  in  stock,  and  $23,726,000  in  gold." 

The  efforts  of  the  Commission  to  ascertain  the  actual  cost 


— 9— 

of  construction  of  the  railroad  to  the  Contract  and  Finance 
Company  were  much  cbstructed  by  the  loss  of  the  books  of 
that  company,  and  of  Crocker  &  Company;  which,  "in  the 
opinion  of  the  Commission,  were  purposely  destroyed  by 
direction  of  Stanford,  Huntington,  Hopkins  and  Crocker. 
The  evidence  on  this  point,  they  say,  appears  to  be  conclusive." 

In  their  judgement,  however  —  which  they  regard  as  being 
very  near  the  truth,  —  "  the  actual  cost  of  construction  of  the 
Central  Pacific  Railroad,  from  Sacramento  to  Promontory 
Point,  and  the  purchase  from  the  Union  Pacific  Railroad  Com- 
pany of  47^  miles,  a  total  distance  of  737.50  miles,  did  not 
exceed  the  sum  of  $36,000,000." 

This  conclusion  is  based  by  the  commissioners  ' '  on  the  ex- 
amination of  many  witnesses  as  to  the  actual  cost  of  railroad 
building  and  material  during  they  ears  of  construction,  on  the 
evidence  taken  of  the  character  of  the  country,  on  the  agreed 
price  paid  by  the  Central  Pacific  to  the  Union  Pacific  for  forty- 
seven  and  one-half  miles  of  the  road  between  Promontory 
Point  and  a  point  five  miles  west  of  Ogden,"  and,  on  "  Mr.  Stan- 
ford's admission  .  .  .  that  the  $54,000,000  of  stock  dis- 
tributed by  the  Contract  and  Finance  Company  was  substan- 
tially a  net  profit,  subject  only  to  the  liquidation  of  the 
indebtedness  of  the  Contract  and  Finance  Conpany,  not  ex- 
ceeding $3,000,000."  (Which  indebtedness  the  Commission 
are  of  the  opinion  from  the  evidence,  did  not  exist). 

The  profits  realized  on  the  whole  road  from  Sacramento  to 
Ogden  were  as  follows  : 

On  Sections  1  to  138  (Crocker  &  Co.) 

In  Cash $  8,536,015.46 

In  Bonds 100,000.00 

In  Stock 14,701,710.28 

$23,337,725.68 

On  balance  of  road  to  Ogden  (Contract  and  Finance  Co.) 

In  Cash »23, 726,000.0.1 

In  Stock 23,726,000.(0 

S47,452.000.00 

?70,789, 725.68 
Actual  cost  of  construction $36,000,000.00 

Profits  realized $34,786,725.68 

The  Western  Pacific  Railroad,     (pp.  76-7). 

The  Western  Pacific  Railroad  Company  was  organized  in 
1862.  This  road,  with  the  exception  of  some  work  done  by 
previous  contractors,  was  constructed  by  the  Contract  and 
Finance  Company,  which  received  in  payment  all  of  the  un- 
issued stock  of  the  company,  all  the  unsold  lands,  all  Govern- 
ment bonds  to  be  received,  and  all  bonds  of  the  Western 
Pac  fie  Railroad  Company  remaining  unsold. 

The  road  of  the  San  Francisco  Bay  Company,  organized  by 
Stanford,  Huntington,  Hopkins,  Charles  Crocker  and  E.  B. 
Crocker,  was  also  constructed  bv  the  Contract  and  Finance 


lO — 

Company.  For  the  work  done,  and  materials  furnished,  it 
received  the  sum  of  $3,265,000,  of  which  amount  $2,395,000 
was  paid  in  stock  of  the  company.  This  company  was  consol- 
idated with  the  Western  Pacific  Railroad  Company  on  the  basis 
of  a  total  authorized  capital  stock  of  $10,400,000.  The  West- 
ern Pacific  Railroad  Company,  thus  consolidated,  represented 
123  miles  miles  of  railroad,  from  Sacramento  to  San  Jose,  and 
26^  miles  of  railroad  of  the  San  Francisco  Bay  Railroad  Com- 
pany, in  all,  149^2  miles.  It  was  received  into  the  Central 
Pacific  Railroad,  subject  to  a  bonded  indebtedness  of 
$4,804,000,  and  with  a  capital  stock  of  $7,900,000,  which  was 
exchanged,  dollar  for  dollar,  for  stock  of  the  Central  Pacific 
Railroad. 

'  *  The  actual  cost  of  construction  of  this  railway  *  *  *  is  con- 
tained in  the  books  of  the  Contract  and  Finance  Company,  and  there- 
fore, cannot  be  accurately  ascertained.  Most  of  the  construction  was 
through  a  country  which  presented  no  peculiar  difficulties,  and  it  may  be 
safely  assumed  that  the  entire  stock  converted  into  the  stock  of  the  Cen 
tral  Pacific  Railroad  Company  represented  no  contribution  whatever  of 
money  or  value,  and  that  the  cost  of  construction  did  not  exceed  the 
bonded  and  floating  indebtedness  of  the  road."     (pp.  76-7). 

The  San  Joaquin  Valley  Railroad,     (p.  77). 

This  road  (leaving  out  of  view  the  sum  of  $30,500  charged 
to  construction  at  the  time  of  the  consolidation  of  the  Com- 
pany with  the  Central  Pacific  Railroad  Company),  was  built 
under  contract  with  the  Contract  and  Finance  Company, 
which  cannot  be  found.  The  payments  for  construction  con- 
.sisted  of  $6,087,000  bonds  of  the  Central  Pacific  Railroad, 
secured  by  mortgage  upon  the  San  Joaquin  branch,  dated 
October  i,  1870,  and  $2,087,000  of  the  capital  stock  of  the 
Central  Pacific  Railroad  Company. 

"  These  payments  were  made  by  the  votes  of  vStanford,  Hutuiti^loii, 
Hopkins  and  Crocker,  while  they  were  owners  and  controllers  of  the 
Contract  and  Finance  Company,  in  the  same  manner  as  has  been  found 
to  apply  to  all  contracts  with  the  Contract  and  Finance  Company." 

California  and  Oregon  Railroad,     (pp.  77^80). 

This  road,  from  its  intersection  with  the  Central  Pacific 
railroad  to  Redding,  was  constructed  by  the  Contract  and 
Finance  Company  —  who  received  therefor  $20,000  in  goM  and 
$30,000  in  stock  —  from  Redding  to  Delta,  a  distance  o'  48.38 
miles,  by  the  Central  Pacific  Railroad  Company  ;  from  Delta  to 
the  State  line  a  distance  of  103  miles,  bv  the  Pacific  Improve- 
ment Company  —  a  corporation  formed  after  the  dis.solution  of 
the  Contract  and  Finance  Company,  and  in  which  Stanford, 
Huntington,  Crocker  and  the  administratrix  of  Hopkins  were 
sole  stockholders. 


— II — 

"  The  cqrsideration  for  the  construction  of  these  103  miles  of  railroad 
and  of  the  equipment,  as  stated  in  the  contract,  was  80,000  shares  of  the 
stock  of  the  Central  Pacific  Railroad  Company  (|8,ooo,ooo),  and 
14,500,000  of  the  bonds  of  the  Central  Pacific  Railroad  Company.  *  * 
The  average  market  value  of  the  Central  Pacific  stock,  taken  from  actual 
quotations  from  the  New  York  Stock  Exchange,  during  the  month  of 
October,  1886,  was  I48.  At  this  rate,  the  $8,000,000  stock  was  worth  in 
cash  $3,840,000.  The  bonds  paid  the  Pacific  Improvemement  Company 
were  worth  par." 

The  actual  cost  of  this  construction,  and  of  the  equipment, 
as  shown  by  the  books  of  the  Pacific  Improvement  Company, 
was  $3,138,606.32,  to  which  is  to  be  added  for  work  to  be  com- 
pleted, $317,000,  making  the  total  cost  $3,505,  600.32. 

"  In  addition  to  the  railroads  hereinbefore  described,  which  complete 
the  corporation  known  as  the  Central  Pacific  Railroad  Company,  a  large 
number  of  branch  and  auxiliary  lines  have  been  from  time  to  time  con- 
structed by  the  Contract  and  Finance  Company,  the  Western  Develop- 
ment Company,  and  the  Pacific  Improvement  Company.  These  roads  as 
completed  were  leased  to  the  Central  Pacific  Railroad  Company.  *  * 
To  all  these  railroads  the  bond  issue  exceeds  the  actual  cost  of  construc- 
tion. These  bonds,  though  nominally  issued  to  the  construction  com- 
panies, were,  of  course,  the  property  of  the  stockholders,  Stanford,  Hunt- 
ington, Hopkins  and  Crocker;  and  the  result  of  the  leases  was  to  compel 
the  Central  Pacific  Railroad  Company  to  pay  the  interest  of  these  bonds 
and  in  some  cases  dividends  on  the  stock."     (p.  80.) 

"In  the  following  table,  we  have  stated  the  cost  of  the  Central 
Pacific  Railroad,  as  that  corporation  exists  today,  as  determined  by  us 
from  the  evidence  offered  ;  and  also  the  consideration  paid  therefor  in 
bonds,  stock  and  cash. "     (p.  80). 


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__i3— 

' '  The  result  is,    that  the  Central  Pacific  Railroad  paid  for  this  con- 
struction : 

In  cash $41,573,719.47 

In  bonds 18,713,000.00 

In  stocks .-. 60,585,810.22 

Total $120,872,529.69 

Total  cost  of  construction 58,301,831.85 

Leaving  Surplus  profits  of $  62,570,697.84         (p.  82). 

' '  Of  which  there  were  : 

Stocks $60,585,810.22 

Bonds 1,984.887.62 

Referring  to  a  similar  table  showing  the  cost  of  construc- 
tion and  the  amount  paid  for  the  leased  railroads  (which  is 
omitted),  the  Commissioners  say: 

' '  The  result  therefore  is  that  the  respective  companies  named  in  the 
table  paid  therefore: — 

In  cash $  28,686.00 

In  bonds 32,722,000.00 

In  stocks 49,005,800.00 

Total $82,756,486.00 

Total  cost  of  construction 27,216,931.00 

Leaving  surplus  profits  of 55.539,554.99"        (p.  82) 

Construction  of  Union  Pacific  Railroad  and  Branches. 

On  this  branch  of  the  subject,  the  majority  report  adopts 
"  the  results  reached  by  the  Wilson  Committee  as  applicable  to 
the  construction  of  the  Union  Pacific  Railroad  between  Omaha 
and  Ogden,  a  distance  of  1,029.38  miles"  (pp.  50-1),  which 
were  in  substance  as  follows  : 

"The  Union  Pacific  Railroad  from  Omaha  to  Ogden  was  constructed 
under  three  contracts,  known  as  the  '  Hoxie  contract, '  the  '  Ames  con- 
tract, '  and  the  '  Davis  Contract, '  by  which,  through  the  intervention  of 
assignments  made  by  the  holders  of  these  contracts  to  trustees,  and 
through  the  intervention  of  a  construction  company  known  as  the  Credit 
Mobilier  of  America,  profits  derived  from  these  contracts  were  secured  to 
the  officers  and  promoters  of  the  Union  Pacific  R  ailroad  itself.  The  per- 
sons who  received  these  profits  determined  the  amount  thereof  by  their 
own  votes. 

The  result  of  these  contracts  was  as  follows  : 

Cost  to  Railroad  Company  : 

Hoxie  contract $12,974,416.24 

Ames  contract 57,140,102.94 

Davis  Contract 23,431,768.10 

Total ?93..546,287.28 

Cost  to  cnotractors : 

Hoxie  contract %  7,806,183.98 

Ames  contract 27,285,141.99 

Davis  contract ;..  15,629,633  62 

$50,720,958.94 

142,825,328.34 
To  this  should  be  added  the  amount  paid  Credit 
Mobilier,  on  account  of  58  miles %  1,104,000.00 

Total  profit  on  construction 143,929,328.34 

"The  actual  cost  of  construction  under  these  three  contracts  was  sub- 
stantially equivalent  to  the  proceeds  of  the  first  mortgage  bonds  of  the 
company,  and  of  the  Government  bonds." 


—14 

The  Kansas  Pacific  Railroad,     (pp.  54-65)- 

The  Commissioners  give  a  detailed  account  of  the  financial 
operations  of  this  railroad,  which,  after  becoming  insolvent, 
was  acquired  by  Jay  Gould  ;  and  afterwards,  by  what  was 
called  by  them,  an  "extraordinary  transaction."  consolidated 
with  the  Union  Pacific. 

The  Consolidated  Road. 

The  three  years  following  the  consolidation  were  years  of 
great  business  activity,  and  the  gross  receipts  for  the  years 
1 880- 1 883,  both  inclusive,  were   largely  increased. 

Tl  e  gross  receipts  f.  r  these  four  years  were , $89,27.3,322.32 

The  operating  expenses  f.  rihe  same  period 43,438,335.89 

Leavine  as  net  earnings 46,834.986.43 

The  interest  and  oth»  r  charges.  Jess  miscellaneous  receipts 

were $21,936,417.09 

Dividends  paid  during  the  same  years 15,643,448.13 

Tttal  37,579,8G5.22 

Leaving  to  accumulate  as  surplus 8,255,121.21 

The  Commission  caustically  reviews  the  connection  of  Mr. 
Gould  with  the  company,  which,  however,  fortunately  ceased 
in  1883.  (p.  66).  It  appears  that  by  fraudulent  manipulation 
of  the  affairs  of  the  company,  and  the  extravagant  dividends 
paid  during  the  period  of  his  connection  with  it,  "in  the  face 
of  the  very  large  and  apparantly  profitable  business  indicated 
by  the  foregoing  figures  .  .  .  the  Union  Pacific  Railway 
Company  found  itself,  early  in  1884,  o"  the  verge  of  bank- 
ruptcy." (p.  67).  Since  then,  in  the  opinion  of  the  Com- 
missioners, the  company's  affairs  have  been  honestly  and  effi- 
ciently managed. 

Branch  Lines,     (pp.  65-68). 

The  branch  lines  of  the  Union  Pacific  Railroad,  in  the  opin- 
ion of  the  majority  of  the  Commissioners,  were  constructed 
with  economy,  and  were  a  source  of  revenue,  and  a  great  ad- 
vantage to  the  system,     (pp.  56). 

Construction  of  the  Central  Branch  Union  Pacific 
Railroad,     (pp.  96-102). 

"The  methods  employed  in  the  history  of  the  construction  of  this 
road  diflFer  from  those  applicable  to  the  Central  Pacific  Railroad  Com- 
pany in  this  respect :  In  the  case  of  the  Central  Pacific  Railroad  Com- 
pany, the  security  of  the  United  States  was  impaired  by  the  distribution 
of  its  stock  without  consideration,  the  exhaustive  payment  of  dividends. 


—  15— 

and  the  diversion  of  its  assets  through  construction  contracts.  In  the 
case  of  the  several  branches  of  the  Union  Pacific  Railroad  Company,  the 
result  was  attained  by  issuing  a  large  majority  of  the  first  mortgage 
bonds  without  the  payment  of  any  consideration  to  the  company."   (p.  98). 

Construction   of   the  Sioux   City    and    Pacific    Railroad. 
(pp.  102-106). 

' '  There  are  no  construction  books  and  no  vouchers  in  exis- 
tence from  which  any  information  can  be  gathered  relating  to 
the  construction  of  this  road.'-  (p.  102).  The  cost  of  con- 
struction and  the  amount  paid  therefor,  as  well  as  they  could 
be  ascertained  by  the  Commissioners,  will  appear  from  the  fol- 
lowing table  compiled  from  their  report : 

First  mortgage  bonds  amounted  to $1,628,000  00 

J  he  government  bonds 1.628.320  00 

(apital  stock 1,791,40J  00 

Total $5,047,720  00 

Actual  cost  of  construciion  between  $2,500,000  and. ..$3,000,000  00 

Profit  on  construction,  at  least $2,047,720  00 

It  appears  from  the  minutes  of  the  company  that  the  first 
mortgage  bonds  were  divided  up  among  the  stockholders  as  a 
dividend,     (p.  103.) 

Comparison   of  Capitalization,    with    actual  cost,    of  the  Pacific 
Railroads,     (pp.  137-140). 

The  above  statements  show  how  the  assets  of  the  several 
companies  were  appropriated  by  the  managers  by  means  of 
extravagant  construction  contracts,  with  the  evident  purpose, 
and,  possibly,  the  effect,  of  defeating  the  claims  of  the  Govern- 
ment for  the  repayment  of  the  enormous  sums  loaned  by  it  to 
the  companies.  Important,  however,  as  is  this  aspect  of  the 
case,  it  is  insignificant  as  compared  with  the  evil  effects  of 
excessive  capitalization  upon  the  interests  of  the  people  west  of 
the  Mississippi  river,  in  increasing  transportation  and  freight 
rates.  This  aspect  of  the  subject  is  dwelt  upon  at  length  by 
Governor  Pattison  in  his  report,  and  is  illustrated  by  the  tables 
prepared  by  him,  which,  though  to  some  extent  covering  ground 
already  passed  over,  are  here  given  : 

''The  Union  Pacific  (1,038.68  miles)  was  built  for  $38,824,000,  and 
the  company  issued  bonds  and  stock  as  follows  : 

First  mortgage  bonds $  27,237,000  00 

United  States  bonds 27,236,512  00 

Land  grant  bonds 9,224,000  00 

Income  bonds 9,355,000  00 

Stock 36,762,300  00 

Total $109,814,812  00 

Cost  of  construction $  38,824.000  00 

Fictitious  capital $  70,990,812  00 


— 16— 

"Onethinu^  is  evident,  after  allowing  for  discount,  the  road  was  built 
for  less  than  the  proceeds  of  the  first  mortgage  and  Government  bonds, 
which  had  a  face  value  of  154,465,512,  the  builders  taking  as  profit  part 
of  the  proceeds  of  the  sale  of  those  bonds,  as  well  as  the  income  bonds, 
the  land  grants  bonds,  and  the  stock,  and  charging:  up  on  the  books  of 
the  company  as  cost  of  construction,  1109,814,212,"     (p.  137.) 

'•  The,  Kansas  Paoific,  aided  portion  (393.94  miles)  was  built  for 
about  |i  1,800,000,  under  what  was  called  'an  exhaustive  contract,'  which 
took  all  the  bonds  and  stock  of  the  company,  amounting  to  $25,028,250, 
as  follows  : 

First  mortgage  bonOs S  6,303,000  00 

rnited  States  bonds 6,303,000  00 

lAnd  grants -. 1,574,750  00 

Second  land  grant 1,500,000  00 

Income 4,275,00<>  00 

Stock 5,072.500  00 


Total !J25.028,250  00 

Cost  of  construction 111. 800.000  00 

Motions  capital !?l3,2iS2.50  0(^t        (p.  138 

) 
"The  Central  Pacific  actually  received  less  than  |76o,oooin  cashjaud 
bonds  on  account  of  stock  subscribed,  while  it  issued  stock  to  the  amount 
of  $54,000,000.  The  *  *  *  aided  portions  (860.66  miles)  were  built 
for  140,000.000,  for  which  bonds  and  stock  were  issued  by  Messrs.  Leland 
Stanford.  CoUis  Huntington.  Mark  Hopkins  and  Charles  Crocker,  or 
under  their  direction,  as  follows  : 

Bonds 9  70,2ll.6sa  00 

Stock 54,000.000  00 


Total  issue  of  bonds  and  stock $124,211,680  00 

Cost  of  construction 40.000,000  00 


Fictitious  capital 9  84,211,6S0  00        (p.  13S) 

"The  bonds  reduced  to  a  gold  basis,  yielded  152,708.742.56.  So  that 
the  four  men  who  managed  that  company  profited  to  the  extent  of  over 
|i 2,000,000,  in  addition  to  152,000,000  of  the  stock,  which  they  divided 
among  themselves  and  subsequently  sold  at  high  figures,  after  declaring 
to  the  amount  of  $18,453,670.00."     (pp.  138-9.) 

"  llie  Sioft.r  Cift/  and  Pacific  capitalized  its  road  (101.77  miles)  in 
bonds  and  stocK  to  the  amount  of  $5,047,720.00,  as  follows  : 

First  mortgage  bonds ?1,62S,000  00 

United  States  bonds 1,6-28,320  00 

Common  stock 1.7i»l,400  00 


Total ^ *5;O47,7-20  0) 

Cost  of  construction 2,6'0,00J  00 

Profit  in  bonds 92,447,720  00 

"  It  (this  company)  distributed  among  its  stockholders,  without  con- 
sideration, over  $2,400,000.  of  which  $1,628,000  was  in  first  niortgage 
bonds  and  the  remainder  in  government  bonds.  Every  stockholcfer  who 
paid  in  I40  received   in  return    alx)ut  $120  in  securities  and  property." 

(P-  I39-) 

''The  Central  Branch  Cornpant/  received  $386,700  on  account  of 
.stock  issue  of  one  million.  This  road  (100  miles)  was  built  for  $2.731. - 
347.23,  for  which  bonds  and  stock  were  issued  as  follows  : 

First  mortgage  bonds 91.600,000  00 

United  States  bonds 1.600,000  00 

Stock, 1,000,0(^0  00 

Total $4,200,000  00 

Cost  of  construction .  2,731,347  23 

Fictitious  capital *1,468,652  77 


—17— 

"Of  the  first  mortgage  bonds,  $400,000  was  used  for  purposes  that 
no  one  has  been  able  to  explain  ;  $400,000  more  in  these  bonds  was  given 
away  as  bonus  to  stockholders  for  stock  subscriptions. 

"It  will  be  apparent  from  these  figures  that  the  roads  (i.e.  the  Pa- 
cific Railroads  generally)  were  bonded  and  stocked  on  an  excessive  basis, 
the  profits  amounting  to  1172,347,115  going  to  construction  companies 
or  inside  combinations." 

Stock  Illegally  Issued. 

From  the  above  history  of  the  methods  of  construction 
pursued  by  the  managers  of  the  Pacific  Railroads,  it  appears 
that,  except  in  the  case  of  one  of  the  smaller  roads,  all  the 
stock  of  the  companies  was  appropriated  by  the  directors, 
under  the  construction  contracts  referred  to,  and  that  besides 
other  profits,  the  stock  thus  received  was  in  all  cases  clear 
profit.  This  was  obviously  in  contravention  of  the  second 
section  of  the  Act  of  July  2nd,  1864,  by  the  provisions 
of  which  money  only  was  to  be  received  for  any  such  assess- 
ment, or  as  equivalent  for  any  portion  of  the  capital  stock 
authorized. 

"  The  Commission  reports  that  this  obligation  has  not  been  kept  by 
any  of  the  bond-aided  railroad  companies." 

"The  capital  stock  of  the  Union  Pacific  Railway  Company  now  out- 
standing is  $60,868,590.  On  this  amount  not  more  than  sixteen  per  cent, 
has  been  received  in  cash. 

"The  stock  of  the  Kansas  Pacific  Railroad  Company,  before  consol- 
idation, was  $9,687,900.     Of  this  amount  no  part  was  issued  for  cash. 

"  The  capital  stock  of  the  Western  Pacific  Company,  before  consoli- 
dation, was  ^,900,000.  Not  more  than  $200,000  was  received  by  the 
said  company  for  this  stock. 

"  The  capital  stock  of  the  Central  Pacific  Railroad  Company  now 
outstanding  is  $68,000,000.  of  this  amount  not  more  than  $7,000,000 
was  issued  for  cash. 

"The  capital  stock  of  the  Central  Branch  Union  Pacific  Railroad 
Company  was  |i, 000,000,  of  which  $392,225.53  was  received  in 
cash."     (P.  106) 

(3)  SUBSEQUENT  FINANCIAL  MANAGEMENT  OF  THE  PACIFIC 

RAILROADS. 

The  net  earnings  of  the  Centjal  Pacific,  after  deducting 
"  operating  expenses,"  **  interest  and  taxes  paid,"  and  "  Gov- 
ernment requirements,"  are  reported  by  the  Commission  to 
have  been  as  follows  : 

From  1863  to  the  31st  of  Decemoer.  1869 ?  2,427.533  80 

From  the  1st  of  January,  1870.  to  the  Slst  of  Decem- 
ber, 1873,  in  which  the  latter  year  the  first  divi- 
dend was  paid 6,575,519  32 

From  the  1st  of  January,  1874,  until  the  1st  of  Janu 
ary,  1884,  which  was.  the  end  of  the  dividend-pay- 
ing period  of  the  company 52,5.36,91(>  99 

1884.  Net  income 1,484.225  24 

1885.  '•  "        1,861,63107 

1886.  "  "        2,699,210  38 

§67,585,1)46  80     (pp.  88-9 1 . 
"During  the  period  from  January  ist,  1874,  to  January    ist,  18S4,  the 


— 18— 

Central  Pacific  Railroad  Company  distributed  to  its  stockholders  in  divi- 
dends the  sum  of  132,308,055.  But  little  stock  was  sold  by  Stanford, 
Huntington,  Hopkins  and  Crocker  until  1S80.  Between  1873  and  1877 
they  were  substantially  the  only  stockholders  of  the  Central  Pacific  Rail- 
road. Nearly  the  entire  amount  of  dividends  declared  during  these  years 
was,  therefore,  received  by  these  four  persons."     (p.  87). 

The  balance  of  the  net  earnings  (35,276,001.80),  must 
have  been  used  in  construction,  either  of  the  branch  roads  or 
of  the  leased  lines  ;  both  of  which  were  bonded  by  the  parties 
named  for  amounts  in  excess  of  their  actual  value.  The 
whole  amount  of  net  earnings  must  therefore  be  regarded  as 
appropriated  by  the  directors  named. 

The  earnings  of  the  Union  Pacific  Railroad  were  as  follows  : 

The  earnings  of  the  Union  Pacific  Railroad  up  to  the 
change  in  management  in  1884  were  as  follows  : 

Gross  earnings  1870  to  1879,  inclusive %  109,017,067-79 

Operating  expenses,  same  period 5«.659,933.(>i 

Net  earnings 58,367,133.73         (p.  52). 

Add   net   earnings    1880-1883,   inclusive,   as   per 
Table,  sujn-a  p.  14 45,438,986.43 

Net  earnings,  1870  to  1883,  inclusive SlO:i, 800.120.10 

Of  which  there  was  distributed  in  dividends: 

From  1870  to  1879 14,mj,12...uu 

From  1880  to  1883 15,«>43,448.13 

Total *-^<>  -^^  --'  '•• 


II. 

INDEBTEDNESS  OF  THE  PACIFIC   RAILROAD  COM- 
PANIES TO  THE  GOVERNMENT  AND  THEIR 
PRfiSENT  FINANCIAL  CONDITION. 


(i)     INDEBTEDNESS  TO   GOVERNMENT. 

The  debts  of  the  several  companies  to  the  United  States  at 
maturity  will  be  as  follows  : 

Central  Pacific  Company  : 

Principal,  including  debt  of  Western  Pacific  Co $27,855,680  00 

Int.  at  6  per  cent.  30  years— 180  pei  cent 50,140,224  00—  77.996,904  00 

Union  Pacific  Cornpanij  : 

Principal,  including  debt  of  Kansas  Pacific  Co $33,539,512  00 

Int.  at  6  percent,  30  years-180per  cent 60,371,121  •')()—  s*:;,'M0.633  60 

Central  Branch  Union  Pacific  Company  : 

Principal  Qf  debt : |  i.eoo.uo-  uu 

Int.  at  6  per  cent,  30  years-  180  per  cent 2,880,ti00  00—    4,480,000  00 

Sioux  City  a  tut  Pacific.  R.  R.  Company  : 

Principal  of  debt $  1.628,320  00 

Int.  at  C  per  cent,  30  years— 180  per  cent 2,930,976  00-    4,559,296  00 

Total >180,945,833  60 


—19— 

From  this  amount  the  sums  in  the  Treasury  of  the  United 
States  to  the  credit  of  the  sinking  funds  of  the  several  com- 
panies ($ ),  are  to  be  deducted. 

In  the  above  statement  it  is  assumed  by  the  Commissioners 
that  the  payments  made  by  the  United  States  as  interest  on 
bonds  do  not  carry  interest.  But  this  is  opposed  to  the  general 
rule  that  where  money  is  paid  to  the  use  of  another,  interest  is 
to  be  charged.  If  interest  is  chargeable,  the  debts  will  be 
increased  by  interest  at  6  per  cent  for  an  average  period  of 
fifteen  years,  amounting  in  the  aggregate  to  $83,752,071. 

(2)    lylABILITIES. 

The  bonded  debt  of  the  Central  Pacific  company,  as  consoli- 
dated, independently  of  the  debt  to  the  government,  exceeds 
the  estimated  cost  of  reproducing  all  these  roads  (except  in  the 
case  of  the  Union  Pacific)  and  is  as  follows: 

First  mortgage,  Series  A,  B,  C  and  D $  6,378,000  00 

First  mortgage,  Series  E,  F,  G,  H  and  1 19,505  00 

California  and  Oregon  first  mortgage.  Series  A  &  B.,  11,800,000  00 

Western  Pacifi.c  Series  A 1,970,000  00 

Western  Pacific,  Series  B 765.000  OC 

Land  grant  first  mortgage 4,570,000  GO 

50-vear  bonds  of  1886 7,063,000  00 

Sail  Joaquin  Vallev  railroad 6.080,000  00 

Calilornia  state  aid 284,000  00 

San  Francisco,  Oakland  and  Alameda 687,000  00 

Income  bonds 3,285,000  00 


Total $62,387,000  00 

Government  lien 27,856,000  00 


Total  funded  debt $90,242,680  00 

To  which  should  be  added  interest  due  to  United 
Stateson  bonds , 50,140,224  00 


$140,382,904  00  (p.  24 

The  total  funded  debt  of  the  Union  Pacific  Company,  on  the  31st  day  of  December, 

1886,  exclusive  of  debt  to  the  United  States,  is $81,969,127  50 

Add  debt  to  the  U.  S.,  principal J33,593,521  00 

Interest 60,371,121  60—    93,910,633  0 


$175,879,76110         (p.  23.) 

The   bonded   debt  of  the  Central  Branch  Union  Pacific  road  is  as 
follows : 

First  Mortgage  bonds $  1,600,000  00 

Funding  bonds 630,000  00 

Debt  to  United  States  :    Principal $  1,600.000  00 

Interest 2.880,00l»  00       4,480,000  00 


$  6,710,000  00  (p.    2  6) 

The  bonded   debt   of  the  Sioux   City    and   Pacific   Company   is  as 


follows 


First  Mortgage  bonds .'. $  1,628,000  00 

Debt  to  United  States  :    Principal $  1,628,320  00 

Interest'...' 2,920,976  00       4,559,296  00 


$  6,1  87,296  00  (p.  28). 

(3)     ASSETS  OF  THE  COMPANIES. 

The  assets  of  the  several    companies,   as  reported    by   the 
Commissioners,  are  merely  the  roads  and   equipments,  consi.st- 


20 

ing  of  the  subsidized  lines,  and  the  branch  roads  afterwards 
constructed.  In  the  opinion  of  the  Commissioners,  the  value 
of  the  former  —  with  the  exception  of  the  Union  Pacific  —  is 
less  than  the  amount  of  the  first  mortgage  bonds.  The  latter 
also  are  mortgaged  to  their  full  value.  The  mortgaged  pro- 
perty theretore  constitutes  no  security  for  the  debt.  This  ap- 
pears fully  from  the  detailed  statement  given  by  the  Commis- 
sioners, which  is  as  follows  : 

The  subsidized  portion  of  the  Ceyitral  Pacific  Railroad 
extends  to  a  point  five  miles  west  of  Ogden,  Utah,  to  Sacra- 
mento, California,  a  distance  of  737.50  miles,  and  from 
Sacramento  to  San  Jose,  123.16  miles.  The  latter  line  was 
formerly  known  as  the  Western  Pacific  Railroad. 

The  Central  Pacific  embraces,  by  consolidation  of  date 
1870,  the  following  branches,  viz.:  ist,  The  San  Francisco, 
Oakland  and  Alameda  Railroad,  extending  from  Niles  to  Oak- 
land, 24.31  miles.  2nd,  The  California  and  Oregon  Railroad, 
from  Roseville,  California,  to  the  boundry  of  the  State  of 
Oregon,  296.57  miles.  3d,  The  San  Joaquin  Valley  Railroad, 
from  Lathrop  to  Goshen,  146.8  miles.  Total  mileage  of 
Southern  Pacific  Railroad,  1,357.29  miles,  of  which  860.77 
miles  are  subsidized,  and  495.52  miles  are  unsubsidized. 

The  value  of  the  Central  Pacific  Railroad  as  at  present  con- 
solidated, as  estimated  by  Col.  Morgan,  is  $1 10,000,000  ;  but 
'*  this  estimate,  in  the  judgment  of  the  Commission,  is  excess- 
ive, and  out  of  proportion  with  the  cost  of  production  as  fixed 
by  Col.  Morgan,  which  is $50,863,540."     (p.  23). 

The  Union  Pacific  Railway  proper  consists  of  the  main  line 
trom  Council  Bluffs  on  the  Missouri  River  to  a  point  five  miles 
west  of  Ogden  (1,038.35  miles),  and  of  the  railways  formerly 
known  as  the  Kansas  Pacific  and  the  Denver  Pacific,  the 
aggregate  length  of  which  is  772  miles,  of  which  only  393.94 
miles  next  west  of  the  MiSvSouri  River  were  subsidized.  Total 
length  of  lines  1,815.57  miles,     (p.  4). 

Numerous  branch  lines  in  Kansas,  Nebraska,  Colorado, 
Utah  and  Oregon  have  been  constructed  by  this  company,  the 
mileage  of  which  exceeds  the  mileage  of  the  main  road. 

'*  The  total  mileage  of  the  Union  Pacific  proper  is,  as  above 
stated,  1,832  45  ;  the  total  mileage  of  the  connecting  branches 
is  2,761.93  miles."     (p.  11). 

With  reference  to  the  latter,  "it  is  suflBicient  for  the  present  purpose 
to  say  that  the  system  is  operated  as  a  whole  ;  that  the  branches  and  the 
main  Hne  are  mutually  dependent  on  each  other  for  support  and  devel- 
opment, and  that  through  this  system  they  represent  a  vastly  greater 
earning  power  than  would  either  the  branches  or  main  line  itself  were 
they  dismembered.  IHie  net  earnings  of  the  system  taken  for  the  past 
three  years  (by  which  term  is  now  meant  their  gross  earnings  less  their 
operating  expenses  and  taxes)  have  averaged  $9,800,000 ;  of  which  sum 
$8,200,000  should  be  credited  to  the  parent  line,  and  $1,600,000  to  the 
branch  svstem. 


— 21 

"The  actual  value  of  the  system,  as  gathered  from  Col.  Morgan's 
intelligent  examination  based  both  upon  cost  of  construction,  on  the  in- 
creased value  of  terminal  facilities  and  right  of  way,  and  also  on  a  close 
and  critical  examination  of  the  earning  power  of  the  main  line,  may  be 
approximately  stated  at  $150,000,000."     (p.  11). 

It  would  seem,  therefore,  frora  the  figures  given  in  the  re- 
port, that  this  railroad,  including  branches,  must,  at  this  time, 
be  of  a  value  very  nearly  equal  to  the  Government  debt,  over 
and  above  liens  paramount  to  that  of  the  Government,  viz  : 

Value  of  road,  as  here  stated §150,000,000  00  * 

Bonded  indebtedness,  exclusive  of  debt  to  United 
States  (V  p.  18,  ante) 81,969,127  00 

Net  value ^8,030,873  oO 

III. 

LEGAL  REMEDIES  OF  THE  GOVERNMENT. 


These  will  be,  at  the  maturity  of  the  bonds^  to  foreclose  the 
Government  mortgages,  and  then  to  subject  the  other  assets  of 
the  company,  if  any,  to  the  deficiency  judgment. 

(I)     FORECLOSURE. 

The  original  lien  of  the  Government  extended  only  to  the 
subsidized  portions  of  the  roads  of  the  several  companies.  But 
by  the  9th  Section  of  the  Thurman  Act,  approved  May  7,  1878, 
(20  Stat.  56),  the  lien  is  extended  co  all  the  property  of  the 
companies,  from  whatever  source  derived,  and  will,  therefore, 
cover  the  branch  roads,  subject,  of  course,  to  existing  liens.  1 

In  the  opinion  of  the  Commissioners  the  subsidized  portion 
of  the  Central  Pacific  from  Ogden  to  San  Jose  is  worth  less 
than  the  first  mortgage  bonds  ;  and  the  branch  roads  less  than 
the  mortgages  upon  them  at  the  time  of  their  consolidation  with 
the  main  line.  The  only  value  of  the  lien  of  the  Government 
on  this  road  will  then  consist  simply  in  the  power  it  gives  the 
Government  over  other  competitors  of  acquiring  the  road.  For 
the  collection  of  its  debt  it  must  look  to  the  other  assets  of  the 
company. 

The  same  observations  will  apply  to  all  the  other  roads, 
except  the  Union  Pacific. 

This  road,  it  appears  from  the  report,  is  worth,  in  excess  of 
all  prior  liens,  more  than  half  and  probably  not  much  less  than 
the  whole  of  the  Government  debt.  (See  ante,  p.  19.)  An 
offer  was  made  to  the  Commission,  by  the  parties  interested,  to 
pay  the  Government,  for  the  subsidized  part  of  the  road,  $35,- 


1.  In  the  opinion  of  the  Majority  Commissioners  this  provision  of  the  Act  is 
unconstitutional  and  void.  Bnt  no  valid  ground?;  for  this  view  can  be  ass  gned  and 
the  validity  of  the  act  is.  ther--tv.r«i,  assumed.  The  question,  however,  is  not  very 
material.  Whether  the  original  lien  extended  to  the  branch  lines  or  not,  the  judgment 
lien  will  extend  to  them;  aad,  in  the  meantime,  iintil  such  iudgment  be  obtained,  Con- 
gress can  provide  by  appropriate  legislation  against  the  alienation  of  the  property. 


22 — 

000,000  to  extinguish  its  indebtedness  ;  and  as  the  branches 
seem  to  have  been  economically  constructed,  the  value  of  the 
whole  was  probably  greater  ;  and  since  then,  assuming  the 
same  efficiency  of  administration  to  have  continued,  its  value 
has  probably  largely  increased. 

(2)     DEFICIENCY  JUDGMENTS. 

The  Majority  Commissioners  seem  to  assume  throughout 
their  report  that  beyond  the  visible  assets  of  the  Pacific  Rail- 
road companies — that  is,  the  roads  and  their  equipments — there 
are  no  assets  from  which  the  Government  debts  or  any  part  of 
them  can  be  collected  ;  and  this  view  seems  to  prevail  almost 
universally  with  the  public. 

With  regard  to  the  Union  Pacific  Company  and  the  minor 
companies,  the  opinion  is  possibly  correct ;  for  the  managers  of 
those  companies — with  a  juster  appreciation  of  the  resources 
of  the  law  than  seems  to  have  characterized  the  managers  of 
the  Central  Pacific — lost  no  time  in  realizing  the  fruits  of  their 
fraudulent  management  and  retiring  from  participation  in  the 
affairs  of  the  company.  They  were  doubtless  originally  respon- 
sible to  the  companies,  but  many  of  them  have  probably  become 
insolvent,  and  those  who  are  solvent  may  be  protected  as 
against  the  company,  and  consequently  also  as  against  the  Gov- 
ernment, by  the  statute  of  limitations. 

The  Ce7itral  Pacific  Company. 

But  with  regard  to  the  Central  Pacific  Company,  there  is 
no  room  to  doubt  that  the  whole,  or  at  least  the  greater  part, 
of  the  amount  due  to  the  Government  from  this  company,  as 
reported  by  the  Commissioner — $76,995,904 — can  be  collected. 
(Supra,  p.  18).^ 

The  management  of  this  company  has  continued  substan- 
tially unchanged  throughout  its  history.  It  originally  con- 
sisted of  Stanford.  Crocker,  Hopkins  and  Huntington  ;  and  it 
now  consists  of  the  last  named  gentleman  and  the  personal 
representatives  of  the  others,  and  Mr.  Huntington  and  the 
estates  of  the  others  are  still  in  possession  of  the  assets  of  the 
company,  fraudulentlj-  appropriated;  and  profits  fraudulently 
realized  by  them,  out  of  their  trust  ;  and  it  is  probable  that  their 
estates  are  sufficient  to  satisfy  the  Gov^ernment  indebtedness. 

The  sole  question  to  be  considered,  therefore,  is  as  to  their 
personal  liability  ;  and  that  this  question  must  be  answered  in 
the  affirmative  is  equally  clear. 

As  to  the  facts,  it  is  established  beyond  question  by  the 
reports  of  the  Commission  that  these  gentlemen  by  contracts 
made  with  themselves,  and  by  other  fraudulent  methods,  have 

I.  This  observation  is  made  on  the  assumption  that  no  change  has  taken 
place  in  the  management  since  the  date  of  the  report.  1887. 


—23— 

appropriated  the  whole  of  the  assets  of  the  company,  and 
that  this  was  done  with  the  fraudulent  intent  of  defeating  the 
collection  of  the  debt  due  from  the  company  to  the  Govern- 
ment. They  are,  therefore,  liable  to  the  company,  as  in  every 
case  of  actual  fraud  ;  and,  independently  of  the  doctrine  of 
actual  fraud,  they  come  directly  under  the  familiar  principle 
that  "  where  a  trustee  or  other  person  standing  in  a  fiduciary 
character  makes  a  profit  by  means  of  any  transaction  within 
the  scope  of  his  agency  or  authority,  that  profit  belongs  to  the 
cestui  que  trust,  and  he  is  precluded  from  making  any  profit 
which  can  only  redound  to  his  own  benefit."  (2  Spence's  Kq. 
Jur.  945.) 

Upon  this  point  it  will  be  sufficient  to  cite  the  opinion 
of  the  Supreme  Court  of  the  United  States  in  the  case  of  the 
U.  S.  vs.  The  U.  P.  R.  R.  Co.,  98  U.  S.  609-10,  where  the 
precise  question  was  presented  : 

"The  substance  of  the  charge  is,  that  the  board  of  directors  of  the 
railroad  company  made  contracts  for  building  the  road,  and  for  running 
the  Pullman  cars  on  it,  and  for  mining  its  coal  lands  and  purchasing  the 
coal  so  mined,  which  were  a  fraud  upon  the  company  ;  that  these  con- 
tracts allowed  exorbitant  prices  for  work  done  and  material  furnished  ; 
that  otherwise  they  were  very  advantageous  to  the  other  contracting 
parties  and  injurious  to  the  company  ;  that  in  all  of  them  the  directors, 
or  a  controlling  majority  of  them,  were  interested  adversely  to  the  com- 
pany ;  that  in  fact  they  were,  in  the  name  of  the  company,  making  con- 
tracts with  themselves  as  the  other  party.  In  short,  it  may  be  taken  for 
granted  that,  if  these  allegations  are  true,  as  they  must  be  held  on 
demurrer,  frauds  more  unmitigated  than  those  set  forth  in  this  bill  were 
never  perpetrated  on  a  helpless  corporation  by  its  managing  directors. 

' '  That  these  frauds  are  such  as  a  court  of  equity  would  relieve  in  a 
proper  case,  may  be  seen  in  the  opinion  of  the  Circuit  Court  for  the  Ne- 
braska district,  in  a  suit  growing  out  of  the  Wyoming  Coal  Compony's 
contract.      Wardelf  t;.s.  The  Union  Pacifie  Co,,  4  Dill.  330." 

The  attempted  justification  of  their  fraudulent  conduct  by 
the  directors  of«  the  Central  Pacific  simply  serves  to  bring  out 
more  strongly  the  applicability  of  the  rule  in  question.  We 
quote  from  a  written  argument  filed  on  their  behalf  before  the 
Pacific  Railroad  Commission,  and  referred  to  by  the  President 
in  his  message  transmitting  the  report : 

"  It  is  said,"  say  the  authors  of  this  argument,  "  that  they  (the  diree- 
tors)  violated  a  well  known  rule  of  equity  in  dealing  with  themselves. 
That  they  were  trustees  and  that  they  were  representing  both  sides  of  the 
contract. ' ' 

(But)  "when  it  is  said  that  they  were  trustees,  if  they  did  occupy 
such  relations,  it  was  merely  technical,  for  they  represented  only  their 
own  interests  on  both  sides — there  being  no  one  else  concerned  in  the 
transaction.  They  became  the  incorporators  of  the  company  that  was 
to  build  the  road  :  subscribed  for  its  stock  and  were  the  only  subscribers. 
Therefore,  it  is  difficult  to  see  how  any  one  was  wronged  by  their  action. 
The  rule  of  equity  invoked,  which  had  its  origin  in.  the  injunction,  'No 
man  can  serve  two  masters,'  certainly  did  not  apply  to  them,  because 
they  were  acting  in  their  own  interests  and  were  not  charged  with  the 
duty  of  caring  for  others'  rights,  there  being  no  other  persons  interested 
in  the  subject  matter." 


—24— 

The  attempted  justification,  however,  ignores  the  principle 
that  the  corporation  represents  the  interests  of  its  creditors  as 
well  as  those  of  its  stockholders,  and  ihat  the  former  are  even 
paramount  to  the  latter.  Hence  the  directors  are  trustees 
directly  of  the  company  and  indirectly  of  its  creditors  as  well 
as  its  stockholders. 

It  is,  therefore,  well  said  by  the  President  : 

"  When  the  relations  created  between  the  Government  and  the  com- 
panies by  the  legislation  referred  to,  are  considered,  it  is  astonishsng  that 
the  claim  should  be  made  that  the  directors  of  these  roads  owed  no  duty, 
except  to  themselves,  in  their  construction  ;  that  they  need  regard  no 
interests  but  their  own,  and  that  they  were  justified  in  contracting  with 
themselves  and  making  such  bargains  as  resulted  in  conveying  to  their 
pockets  all  the  assets  of  the  company.  As  a  lienor  the  Government  was 
vitally  interested  in  the  amount  of  the  mortgage,  to  which  its  security 
has  been  subordinated. ' ' 

'•  The  doctrine  of  complete  independence  on  the  part  of  the  directors 
of  these  companies  and  their  freedom  from  any  obligation  to  care  for 
others'  interests  than  their  own  in  the  construction  of  these  roads,  seems 
to  have  developed  the  natural  consequences  of  its  application,  portrayed 
in  the  majority  report  of  the  Commissioners." 

By  the  construction  contracts,  above  referred  to,  the  direct 
ors  received,  in  addition  to  other  profits,  the  whole  of  the  stock 
of  the  company.  This  was  directly  in  contravention  of  the 
second  section  of  the  Act  of  1864,  and  under  that  Act  and  the 
general  law,  independently  of  the  ground  of  fraud,  the  holders  of 
the  stock  are  liable  to  be  assessed  tor  its  whole  value,  and  under 
a  well  settled  and  familiar  practice  in  equity,  any  competent 
court  can  make  the  assessment  at  the  suit  of  the  Government, 
or  any  judgment  creditor. 

Upon  this  stock  there  was  distributed  by  Stanford,  Hop- 
kins, Huntington  and  Crocker  to  themselves  and  the  stock- 
holders, in  dividends  the  sum  of  $32,308,055.  (p.  18,  supra). 
In  making  these  dividends  no  provision  was  made  for  the  pay- 
ment of  the  debt  to  the  United  States,  but  the  evident  purpose 
was  to  defeat  this  indebtedness  and  thus  defraud  the  Govern- 
ment. This  amount,  therefore,  may  be  recovered  both  on 
the  ground  of  fraud,  and  on  the  ground  that  the  stock  was  held 
by  the  stockholders  as  constructive  trustees  of  the  company, 
and  that  the  dividends  also  inured  to  its  benefit  and  were  held 
upon  a  like  trust. 

In  addition  there  are  many  other  instances  given  by  the 
Commissioners  of  misappropriation  of  the  assets  of  the  com- 
pany. The  books  show  the  receipt  by  Stanford  and  Hunting- 
ton of  the  sum  of  $4,818,335.67,  for  which  no  vouchers 
appear.  This,  in  ':he  opinion  of  the  Commissioners,  was  used 
for  the  purpose  of  influencing  legislation  and  other  improper 
purposes,  (p.  84.)  Stanford  and  Huntington  are  responsible 
for  it.  The  directors  of  the  Central  Pacific,  in  conjunction 
with  those  of  the  Union  Pacific,  also  paid  in  subsidies  to  the 
Pacific  Mail  Steamship  Company   the  sum  of  $4,000,000  ;  an 


—25—  ; 

illegal  expenditure  for  which  they  are  liable.  Stanford, 
Crocker,  Hopkins  and  Huntington,  together  with  Mills  and 
Tevis,  also  received  in  the  year  1869  upon  a  contract  made  by 
them  as  directors  with  Wells,  Fargo  &  Company,  one-third  of 
of  the  capital  stock  of  that  company,  (which  was  $5,000,000), 
which  stock  has  ever  since  paid  dividends  at  the  rate  of  eight 
per  cent,  per  annum,  (p.  83)  and  of  which  their  share,  with 
accretions  to  date,  cannot  probably  be  worth  less  than  $5,000,- 
000.  The  total  amount  of  the  assets  of  the  company  misap- 
propriated by  them  will  then  be  as  follows  : 

Profits  of  construction  contracts !i*58,301,831.85 

Dividends 32,308,055.00 

Miscellaneous:— 

Cash  received  lor   which  therp  are  no 

vouchers $4,818,355.67 

One-half  cash  paid  to  Steamshi  p  Co 2,0d0,000.00 

Value  of  Wells,  Fargo  &  Co.  stock 5,000,000.00    11,818,355.67 

Total $102,428,242.52 

In  the  above  table  the  stock  is  charged  to  the  directors  at 
par,  but  if  charged  to  them  at  its  market  value  when  feceived, 
with  interCvSt,  it  would  amount  to  much  more.  Nor  does  this 
table  exhibit  all  of  the  indebtedness  of  the  company  on 
account  of  misappropriated  assets,  but  simply  those  which  the 
Commissioners  were  able  or  deemed  it  necessary  to  trace.  The 
funds  and  assets  of  the  company  were  used  in  many  other 
ways  by  the  directors  as  their  own  ;  and,  among  other  grand 
operations,  they  constructed  long  lines  of  railroad  which  were 
leased  to  the  Central  Pacific  at  exhorbitant  rates,  ($3,490,828 
per  annum,  being  13  per  cent  on  the  inflated  amounts  at 
which  these  roads  were  capitalized;  p.  143).  So  that  if 
fully  investigated  the  indebtedness  of  the  directors  to  the  com- 
pany would  be  greatly  in  excess  of  the  amount  stated  by  the 
Commissioners.  Bu<^,  as  this  amount  is  more  than  sufficient  to 
satisfy  the  indebtedness  of  the  Government,  it  is  needless  to 
pursue  the  subject  further. 


i 


